The Democratic governor said in a recent interview that it’s unfair for family owned non-corporate entities to be shielded from taxes while similar businesses controlled by unrelated investors are required to pay them.
The state has tax exemptions that “range from totally appropriate to highly questionable. This is just one that kind of sticks out like sore thumb,” he said. “It benefits a relatively few, very wealthy people in a way that I think is totally illegitimate.”
The current law allows the state’s about 2,700 family owned non-corporate entities to avoid paying about $45 million in corporate taxes each year.
But changing the tax code has been resisted by Republican Senate Majority Leader Ron Ramsey of Blountville and by House Democratic Leader Gary Odom of Nashville. Both consider the elimination of the exemption akin to a tax hike on family owned businesses.
Ramsey argues that changing the law would just lead those limited liability businesses to restructure as general partnerships, where they could continue to avoid the state’s corporate taxes.
“People are not stupid, they don’t want to pay taxes if they don’t have to,” Ramsey said.
Bredesen said not all businesses would be willing to convert into general partnerships, where owners’ personal assets are not protected from lawsuits. He estimates the state would take in about $25 million a year if the law is changed.
Ramsey acknowledged it will be difficult to win the public relations battle over the family partnerships at a time when the state is trying to cope with a billion-dollar budget shortfall.
If Republicans don’t agree to the changes, Ramsey said they’ll be challenged to make up the money through other cuts and will likely be criticized for those.
“If, hypothetically speaking, you cut it out pre-K, it’d be, ‘These Republicans care more about their business friends than 4-year- olds in Tennessee,’” Ramsey said. “So it’s going to be a very, very tough proposition in today’s climate.”
“I know where we’re headed on this, I can read the tea leaves,” Ramsey said.
Bredesen didn’t rule out setting a threshold to avoid hitting small family partnerships with a large new tax burden.
“But that’s not where the money is,” Bredesen said. “The average size of these things is way out of the range of mom-and-pop businesses who have got $100,000 investments. Way out of that range.”