Haslam plan calls for 7-cent gas tax hike, cuts to grocery sales tax

Gov. Bill Haslam is pushing a 7-cent hike in the state's gas tax, new fees on electric vehicles and rental cars and an end to being able to have an open container of alcohol in a car as part of an overall package aimed at tackling a $10 billion backlog of road projects that have been waiting for funding.

The plan, which is officially known as the Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy or IMPROVE Act, also calls for slashing the state's sales tax on groceries by another half percent, $113 million in cuts to the state's business taxes, as well making additional cuts to the Hall Income Tax.

Flanked by mayors from across Tennessee, as well as a handful of business leaders, Haslam unveiled his plan on Wednesday, which calls for the first gas tax increase since 1989.

"Everybody in here is concerned that Tennessee is the type of place that attracts great jobs. We can't be in a situation where we're at a competitive disadvantage," Haslam said.

The Plan

Under Haslam's proposed plan, Tennesseans would begin to pay an additional 7 cents per gallon on gasoline and 12 cents per gallon on diesel beginning in July.

The dual gas tax increases would net the state's Department of Transportation an additional $227.8 million, with cities receiving about $39 million and counties another $78 million.

Cities and counties would be able to use that money to fund local transportation projects.

The plan also would allow municipalities to hold referendums to decide whether to impose a surcharge on their sales tax rates that would be used to fund public transit projects.

RELATED: Gov. Haslam plan would allow local referendums for transit funding

One of the more intriguing changes in Haslam's plan involves changing the state’s open container law. Tennessee is one of just a few states that allow passengers to have an open container of alcohol if the driver is not drinking. Haslam said the current law prevents the state from using $18 million in federal money annually on road projects, or about the equivalent to one cent of increase on the gas tax, he said.

The plan will also index the gas tax to the Consumer Price Index, meaning the rate will fluctuate with inflation. Currently, Tennessee’s gas tax is a flat rate and has not increased for nearly three decades. Haslam said the current tax equates to be worth about 11 cents per gallon currently. The grocery tax is already indexed, similar to other state taxes. Haslam admitted the index portion of his plan might be the most challenging aspect.

Other changes that Tennesseans will see under Haslam's proposed plan include an increase in vehicle registration fees. The average passenger vehicle would have its registration go up by $5, according to Haslam.

The vehicle registration increases, as well as the gas tax hike would effectively mean the average driver in Tennessee would pay about $4 dollars more a month, he said.

The plan also calls for a new $100 fee paid for by anyone who owns an electric vehicle in Tennessee, as well as an increase in the charges for using alternative vehicles.

The IMPROVE Act also calls for a 3 percent charge on all rental cars.

The overall changes would result in $278 million in annual new dollars that could be used to fund more than 960 transportation projects that are planned across the state's 95 counties.

Tax Cuts

Perhaps as part of the effort to sell the plan to lawmakers, Haslam has included several tax cuts in the IMPROVE Act.

They include cuts to the state's franchise and excise tax. The franchise and excise taxes, though referred to collectively, are separate taxes paid by businesses annually. The franchise tax is paid on real property owned or used by businesses and the excise tax is paid on earnings.

In a morning meeting with reporters, Haslam cited a University of Tennessee study that found Tennessee has the third highest business taxes in the country.

Beyond the business tax cuts, Haslam's plan seeks to reduce the state's grocery sales tax rate to 4.5 percent, down a half-percentage point. That would result in a $55 million revenue reduction for the state and would bring the total grocery sales tax cuts to $101 million since the governor entered office in 2011, according to Haslam.

The final tax cut Haslam is proposing as part of the IMPROVE Act relates to the Hall Income Tax, the tax on earnings from dividends and interest.

Haslam said last year's legislation to phase out the Hall tax required it to be gone by 2022. Under his new plan, Haslam is proposing cutting it an additional 1.5 percentage points this year, with a commitment to cut it an additional 1.5 percentage points next year. Those cuts would result in $102 million in tax cuts, according to Haslam.

The pitch to lawmakers

Haslam needs to sell 132 lawmakers on his plan, especially given the state's nearly $2 billion budget surplus in recurring and nonrecurring money.

Prior to his press conference, Haslam laid out three aspects as part of his pitch to lawmakers.

First, he said, the use of the state's one-time surplus money would not be a good move. "It's paying your mortgage out of your savings account," he said. "Not a good idea."

Haslam also said the state's general revenue fund is mostly paid for by Tennesseans. The difference is that the state's transportation fund is paid for by people who use the state's roads, which includes those living outside Tennessee.

"I don't understand why we want Tennesseans to pay for roads that everybody uses," he said.

Haslam also said the way the transportation fund works right now, a certain percentage goes to cities and counties. By taking money out of the state's general fund to pay for transportation needs, that doesn't take into account the needs of the cities and counties.

Shortly after Haslam's press conference ended, the few lawmakers present offered their thoughts, which ranged from praising the governor for introducing a proposal to alluding to an alternative proposal.

Sen. Paul Bailey, R-Sparta, hailed the inclusion of the local option portion of Haslam’s plan, while not fully endorsing the entire proposal.

“I favor a lot of what the governor has proposed in his plan,” he said, adding that he looks forward to debate the proposal in committee.

Rep. David Hawk, R-Greeneville, called Haslam’s plan a good starting point.

“The majority of us in the legislature realize that there is a real backlog in projects and that we need to come up with a dedicated recurring fund to take care of that,” he said, while alluding to a plan he is looking at that does not have as many "moving parts" as the governor’s. Hawk did not provide additional details on such a plan.

Speaking to reporters after his press conference, Haslam said he would not be insulted if lawmakers came up with their own proposal, adding the legislature needs to “do the hard work” if they’re considering counter measures.

“Dig into the budget and look at the ramifications and consequences,” Haslam said.

Sen. Jeff Yarbro, D-Nashville, said although he anticipates seeing opposition to the plan because it calls for tax increases, the inclusion of tax cuts would help garner support, including among Democrats.

Yarbro, who said he would’ve liked to have seen a larger cut to the grocery sales tax beyond what the governor proposed, would not say whether he anticipated Haslam's gas tax plan to fail in the same way that Insure Tennessee did in 2015.

Other lawmakers who were present in the jam-packed Old Supreme Court Chamber included Rep. Susan Lynn, R-Mt. Juliet, and Sen. Bill Ketron, R-Murfreesboro. Notable absences included House Speaker Beth Harwell, R-Nashville, and Lt. Gov. Randy McNally, R-Oak Ridge.

McNally sent out a statement in which he said Haslam's proposal "makes sense" while reducing the overall tax burden on Tennesseans.

In a statement, Harwell said she looked forward to discussing the plan with her colleagues.

No matter how skeptical lawmakers may be about Haslam's plan, it might become increasingly difficult politically for them to take action, especially when there's pressure in their districts.

T.R. Williams, county executive of Lawrence County who was on stage with Haslam Wednesday, said last year his county had to borrow $2 million to work on infrastructure projects.

"It’s getting very, very difficult for the counties to find funding for it," he said, praising Haslam’s plan. Williams said because of inaction on the issue in recent years, his county has had to resort to tax increases.

Not everyone was pleased with Haslam's proposal though. Andy Ogles, the state director of the Tennessee chapter of Americans for Prosperity, likened the governor's plan to "theft," according to the Associated Press.

Ogles, who pushed for the defeat of Insure Tennessee, said he planned on proposing an alternative that would spend $2 billion on transportation needs over the next decade without raising any taxes.

The legislature will reconvene and likely begin debating the governor's proposal when it returns to Nashville on January 30.

Reach Joel Ebert at jebert@tennessean.com or 615-772-1681 and on Twitter @joelebert29. Reach Jake Lowary at jlowary@gannett.com and on Twitter @JakeLowary.