Gov. Bill Lee on Monday proposed a $47.3 billion general fund budget for fiscal year 2024-2025 during his annual State of the State address while also urging lawmakers to go along with his requests to expand the state’s three-county private school voucher program statewide and then invest additional funds into the public school formula and boost pay for state workers.
At the same time, the Republican governor wants lawmakers to approve major changes in the state’s franchise tax for corporations by eliminating a property tax calculation from the decades-old tax that Lee administration officials say is vulnerable to a legal challenge. The change would cost the state about $1.2 billion up front and result in a $410 annual loss.
Two tax experts and some Democrats argue the tax could be fixed relatively easily. Under Lee’s proposal, the state would ditch the property tax calculation but keep the franchise tax’s levy on a corporation’s apportioned net worth.
Lee acknowledged in his speech that there has been “a good bit of conversation about this change to our franchise tax law, because it is incredibly important.”
“We became aware of a need to change the law, which has been in place for almost 90 years,” Lee said in his remarks as prepared for delivery. “So, we crafted a solution that resolves the issue now so that we can move forward now. And this is the best strategy to ensure we do right by Tennessee taxpayers.”
But a number of legislators, including some Republicans, as well as tax experts question the move and say Tennessee’s problem can be addressed relatively simply.
The tax, which generates about $1.7 billion a year, now assesses companies on the higher of a companies net worth or property owned in the state. The proposed bill would eliminate the property measure so the tax is much simpler, according to administration officials. It would only be assessed on the company’s net worth.
Lee said that over the past five years, Tennessee has been ranked among the nation’s fastest-growing economies, the No. 1 state for fiscal stability, a top state for business, the second lowest-taxed state per capita and the lowest debt state in America.
“Any state would envy the position that we’ve been in,” the governor said. “The members of the Tennessee General Assembly — all of you here tonight, as well as your predecessors — are the ones to thank, because of your unwavering commitment to keeping our state in a strong financial position, by balancing our budget, maintaining a healthy savings account and cutting taxes for Tennesseans year after year.”
The Republican also asked lawmakers to plow about $200 million into conservation initiatives that include $71.5 million for a land trust and $25 million for a farmland conservation fund.
Voucher redux
In statements leading up to his sixth address to the GOP-dominated legislature, Lee said it is time to make “school choice a reality for every Tennessee family.”
He urged state lawmakers to pass the voucher measure, which he has dubbed “Education Freedom Scholarships.” They would provide some $7,075 annually to families to send their children to private schools or for use in home schooling.
The first year would include 10,000 students from low-income families who are under 300% of the federal poverty level – or $90,000 a year for a Tennessee family of four. Another 10,000 could go to higher-income families who may already have their children enrolled in private schools. Lawmakers would have to approve additional funding to expand the program.
While the governor had originally discussed expanding the program to apply universally, Finance Commissioner Jim Bryson told reporters the plan now is to make that subject to future appropriations approved by lawmakers.
“However many scholarships available in future years will be completely dependent on the amount of appropriations that are made by the legislature for those years,” Bryson said.
Coming back down
In total, Lee is asking for $1.75 billion in new spending, of which $458 million would go to K-12 education, $359 million to capital projects, $274 million to TennCare, $158 million toward environment and conservation, $158 million to state employees, and $347 million to other agencies.
It comes as Tennessee tax revenues have substantially trailed off and a federally financed sugar-high of billions of dollars generated by President Joe Biden and the then-Democratic Congress amid concerns about a possible recession comes to an end.
Last year, Tennessee’s general fund budget, including federal dollars, was $55.7 billion.
“We’ve had some pretty good years,” Bryson told reporters, making no mention of the role of federal monies. Bryson said the state has done a “good job managing the good times. It is a little tighter from a budget perspective.”
But Bryson said the state will “come through just fine,” touting “conservative,’ fiscally sound policies.”
For example, Bryson said, the state in the past few years has used recurring revenue for a number of one-time projects and initiatives, with the money still expected to recur with it now available to use elsewhere if needed.
Democrats push back
Minority legislative Democrats last week blasted Republicans and the direction the state has taken in a pre-State of the State rebuttal.
Senate Democratic Caucus Chair London Lamar said Tennesseans could expect Lee to “paint a rosy picture” of the state while “looking past all the challenges facing working families.”
“Tennessee Democrats envision a way forward where hard work, opportunity and justice are a reality for every family — not just the wealthy few,” she said. “We want a state where working families, small business owners and family farmers have a level playing field with giant corporations and every family gets the tools and freedom they need to build a good life.”
The state in the past few years has held lengthy sales tax holiday on grocery food purchase. Bryson said there are no plans to include that in the new budget. If lawmakers want last year’s three-month food sales tax to come back, they’ll have to hunt and find the dollars.
Spending priorities
While the revenues aren’t flowing as freely as in recent yaers, Lee is still proposing some big-ticket items. They include:
- $274 million: TennCare program growth.
- $261 million: Growth in the public school funding formula, including continuing work to bring public school teacher salaries to a base salary of $44,500 per year.
- $233 million: Capital projects at Department of Children’s Services facilities at Woodland Hills Youth Detention Center in Nashville and the John S. Wilder Youth Development Center near Somerville.
- $142 million: Funding for 20,000 “Education Freedom Scholarships,” the governor’s statewide school voucher program.
- $71 million: Land acquisition through the Heritage Conservation Trust.
- $59 million: Conservation capital projects, including creating five new state parks (Hiwassee Scenic River, Ocoee River, Head of the Crow, Fort Southwest and Cardwell Mountain)/.
- $50 million: Rural health resilience program.
- $49 million: Funding a 3% increase in the state employee salary pool.
- $36 million: Economic and Community Development grants for distressed areas.
- $25 million: A farmland conservation fund to stem development in rural areas.
- $24 million: Infrastructure and capital improvement at state airports.
- $33 million: TennCare provider rate increases.
- $20 million: Deposit into the Rainy Day Fund to bring balance to $2.07 billion.
- $17 million: Hiring 60 new Tennessee Highway Patrol positions and buying new equipment.
- $15 million: Behavioral health liaisons.
- $8 million: Hiring 114 school-based mental health liaisons.
