The truth about the IMPROVE Act

Jared Felkins • Updated Jul 26, 2018 at 8:00 AM

When candidates Rep. Susan Lynn and challenger Aaron Shane for the Republican nomination for the state House District 57 seat participated in The Lebanon Democrat’s video forum, much of the debate centered on the IMPROVE Act and more specifically whether it was a tax cut or increase.

Lynn claimed it was a tax cut.  

“I didn’t vote for the IMPROVE Act because I wanted to,” Lynn said. “I held 11 town hall meetings, and I presented both plans. When presented those plans, the people at those meetings saw that the IMPROVE Act was more advantageous because it provided tax cuts to Tennesseans and leveraged the tourists, travelers and truckers that pass through our state. They are paying a little bit more, and we get the tax breaks. We made sure that the food tax cut was absolutely greater than the increase in the gas tax. I think the IMPROVE Act will help us in this area.”

Shane, however, argued it was a tax increase. 

“My opponent voted for the largest tax increase in Tennessee history while our state had a $2 billion surplus,” he said. “That was the gas, diesel and registration fee tax also known as the IMPROVE Act. [It was] completely unnecessary [and] should have never happened. “Not only are we paying more for shirts, shoes, clothing, groceries, everything because the cost of goods is going up, but we are also paying more at the pump. It’s across the board. This is hurting everybody. It’s almost an insult to everyone’s intelligence to call this a tax cut. It blows my mind how this can be spun like it has. It’s hurting everybody.”

Technically, both candidates were right, but both were inaccurate when they presented some of the details, according to state figures released to The Democrat.  

The IMPROVE Act is an acronym for “Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy Act” – a proposal Gov. Bill Haslam introduced in January 2017 and went into effect July 1, 2017 to help fund the state’s $10 billion backlog in road projects.

The IMPROVE Act was designed to be an offset tax, which means taxes are increased in some areas and decreased in others to both generate revenue and lessen the burden on taxpayers at the same time. In the IMPROVE Act’s case, tax rates on gasoline and diesel fuel increased, but the state’s food tax, Hall income tax and business taxes were cut. 

In the first year of the IMPROVE Act, gas and diesel tax collections increased by  $105.36 million. Total gas tax collections last year were about $800 million, and total diesel tax collections were nearly $216 million. 

But, according to Haslam’s spokesperson Jennifer Donnals, Tennessee residents didn’t pay all of gas and diesel taxes. 

“While information is not available to determine actual figures, it can reasonably be determined that at least 30 percent of the gas tax is paid by out-of-state residents,” Donnals said in an email to The Democrat. “The University of Tennessee has estimated that a significant amount of the gas tax is paid by out-of-state residents. In addition, the South Carolina revenue and fiscal affairs office estimated that one-third of the gas tax collections in South Carolina comes from out-of-state residents. Because of Tennessee’s geographic position relative to South Carolina’s, it is more than reasonable to assume at least 30 percent of Tennessee’s gas tax is paid by out-of-state residents.”

When the 30-percent theory is factored, gas tax collections from residents were about $86.3 million, and diesel tax collections from residents were a little more than $19 million when factored at 50 percent, according to Donnals.

The gas tax increased from 20 cents to 24 cents in the first year of the IMPROVE Act and will increase to 25 cents this year and to 26 cents next year and after. The state’s diesel tax increased from 17 cents to 21 cents last year and will increase to 24 cents this year and to 27 cents next year and after. 

The cost to register a vehicle in Tennessee also increased last year due to the IMPROVE Act. The registration fee for passenger motor vehicles increased by $5. The registration fee for commercial motor vehicles for transporting passengers for hire such as buses and taxis increased by $10. The registration fee for commercial and freight motor vehicles such as semis and tractor-trailers increased by $20. A registration fee of $100 was also added for electric vehicles from the IMPROVE Act.  The fee is in addition to the standard registration fee. 

State residents paid nearly $234.4 million in vehicle registration fees last year, and about $38.3 million of that was generated by the IMPROVE Act. Electric vehicle fees generated about $254,000 from the IMPROVE Act. 

The state’s compressed natural gas tax increased from 13 cents to 16 cents last year and will increase to 18 cents this year and to 21 cents next year and after. The state’s liquefied gas tax increased from 14 cents to 17 cents last year and will increase to 19 cents this year and to 22 cents next year and after. State officials didn’t provide information on revenue generated from compressed natural gas and liquefied gas increases.

Also under the IMPROVE Act, the reductions came in food tax, Hall income tax and business tax collections. Food taxes were reduced from 5 percent to 4 percent, which equaled about $110 million in savings last year compared to the about $488.7 million total generated by the state food sales tax. 

The Hall tax applies to interest and dividend income received by Tennessee residents. Dividends subject to the tax are dividends from corporations, investment trusts and mutual funds, including capital gains distributions from mutual funds. Taxable forms of interest include interest on bonds issued by people, corporations, churches, joint stock companies, business trusts, U.S. states and local political subdivisions outside Tennessee and foreign governments, and interest on mortgages, commercial paper and other written obligations that mature more than six months after the date of issue. The Hall income tax accounts for about 2 percent of Tennessee’s state tax collections.

The IMPROVE Act included a plan to phase out the Hall income tax in five years, starting last year The applicable tax rate was 4 percent last year, 3 percent this year, 2 percent next year, 1 percent in 2020 and full repeal that will begin Jan. 1, 2021. Hall tax collections were cut nearly $60 million last year compared to the $246.5 million total. 

The total food and Hall tax collection reduction under the IMPROVE Act was nearly $170 million. 

Business taxes under the IMPROVE Act were affected when a qualifying Tennessee manufacturer that does business both in-state and out-of-state may elect to apportion its net earnings and net worth to Tennessee based on a single sales factor.

Through this, the IMPROVE Act also reduced business taxes by $113 million.

“There is no question the IMPROVE Act resulted in a tax cut. In fact, at full implementation, the IMPROVE Act cuts more than $500 million in taxes, representing the largest tax cut in Tennessee history,” Donnals said. “And if you isolate the gas tax increase and the food tax reduction, you will find the average Tennessee family has saved and will continue to save more at the grocery store than it will spend at the gas pump. It’s not possible to track how much the average Tennessee family has spent or been taxed at the grocery store in the last year, which is why we base our numbers on USDA estimates for a family of four, along with average gas usage and fuel efficiency.”

If the total gas and diesel collection and registration fee increases of about $200 million is subtracted from the total food tax, Hall tax and business taxes reductions of nearly $283 million, there was a net savings of about $83 million. But that doesn’t include increases or compressed natural gas and liquefied gas taxes, which state officials didn’t provide. The $83 million difference was shy of the $300 million in tax cuts during the first year of the IMPROVE Act when taxpayers and Haslam pitched it and about $15 million shy of the promised $125 million in food tax cuts alone.

However, if the 30-percent theory from the gas tax and 50-percent theory from diesel tax are factored for state residents, it would make the total net savings nearly $140 million. 

And, if the food sales tax reduction is compared to the fuel tax increases for residents only, which only affect most average Tennesseans each year, the net savings comes to nearly $5 million. 

It’s not likely that the IMPROVE Act provided the largest net tax cut in state history, as Lynn said. But it’s obvious the act as a whole was not a tax increase this year, as Shane said. Also, Shane’s claims of higher fuel costs paid by businesses passed on to consumers are only partially true. AAA shows the average price of gasoline is 55.2 cents per gallon more currently than it was one year ago, and the price from one year ago includes the 4-cent-per-gallon tax increase. This means only 6 percent of the increase in fuel costs currently can be attributed to the IMPROVE Act. The other 94 percent is due to the rising cost of gasoline, which was passed on to consumers regardless of whether the IMPROVE Act was passed.

IMPROVEments in Roads

Included in the first three years of road projects across the state were 11 projects either currently under construction or planned in Wilson County. The total cost of those projects was about $256 million.

The Wilson County projects include:

• State Route 109 widening from north of U.S. 70 to south of Dry Fork Creek – an $18.5 million project currently under construction. 

• Hartsville Pike widening from south of Spring Creek to north of Lover’s Lane – a $6.5 million project currently under construction. 

• Hartsville Pike right-of-way improvements from south of Spring Creek to north of Lover’s Lane – a $14.7 million project currently under construction.

• Lebanon Road widening from Park Glen Drive to Benders Ferry Road – an $8.6 million project in preliminary engineering. 

• Mt. Juliet Road widening from Central Pike to Providence Way – a $25.4 million project in preliminary engineering. 

• Interstate 40 widening from U.S. 70 south at exit 196 to I-840 and from Donelson Pike at exit 216 to U.S. 70 at exit 239 – a $4 million project in preliminary engineering. 

• I-40 widening from State Route 109 to Interstate 840 – a $32.53 million project in preliminary engineering.

• Central Pike widening from Old Hickory Boulevard to Mt. Juliet Road – a $68.3 million project planned. 

• a new I-40 interchange at Central Pike – a $14.2 million project planned. 

• I-40 widening from I-840 to U.S. 70 – a $61.6 million project planned. 

• Nashville Highway widening from near State Route 53 to near State Route 96 – a $15.2 million project planned. 

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