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Meltdown In Nashville

Meltdown In Nashville

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State Representative Keith Westmoreland, a Kingsport Republican, was never a particularly partisan legislator. The ex-county executive and policeman was fairly across-the-board in his votes as well as his personal relationships, and in the intense dustup over tax policy that characterized the last four years of his tenure in the House, Westmoreland was famous for proposing something of a middle-ground policy.

He favored what he called a "singular exchange tax," which would assess a 3 percent uniform levy on all financial exchanges, including income and sales. It was a curious hybrid of the two main competing tax strategies, and for a while during the General Assembly of 2001, it gained some serious momentum before falling back -- as, in fact, all serious tax proposals had, beginning with the business levies proposed by Governor Don Sundquist in early 1999 when the governor first sounded the alarm about a coming fiscal emergency in state finances and launched his crusade for reformation of the state's tax code.

In the course of time, Westmoreland was brought over to the income-tax camp (as was the governor himself), and in the spring of 2002, as the looming state-government shortfall soared past the billion-dollar mark, he was being counted on by House Speaker Jimmy Naifeh, yet another income-tax convert, as a key player on behalf of Naifeh's own income-tax variant, a "flat tax," or nongraduated, version.

But even as Naifeh's support base began ascending toward the 50-vote total he would need to pass the bill in the House, friends of Westmoreland began noticing signs of strain in him. And he confided to friends that he was drinking too much and taking stout doses of a prescription drug to control mood swings. The Kingsport legislator's legislative buddies were concerned but tended to write it off as just being Westmoreland's way of dealing with the strain that all of them were feeling as tensions, conflicts, and a growing sense of desperation crept into the tax debate.

In mid-May, a tentatively confident Naifeh decided he had his 50 flat-tax votes and let the bill come to the floor. In a shocker, only 45 green, or aye, votes lit the board, however, and a week or two of hiatus followed, during which the Speaker frantically scrambled to round up the faint-hearted and persuade reluctant members before daring another vote.

Naifeh was making progress, it was said, and it seemed possible he would prevail, but a bombshell exploded.

Keith Westmoreland, reported his hometown newspaper in an item that was quickly picked up statewide, had been arrested a few weeks earlier in Florida on charges of indecent exposure. He had allegedly worn skimpy cover in a motel's hot tub and had thereby exposed himself to some underage females.

The news had broken just as the legislature was reconvening for what was thought to be a decisive week, and Westmoreland's predicament was compounded when it was reported that Davidson County metro police were investigating him for similar incidents in the Nashville area. Westmoreland appeared on the floor one day that week, while outside the Capitol, antitax protesters added his name to the triad of Sundquist, Naifeh, and Senator Bob Rochelle of Lebanon, the legislature's foremost income-tax proponent, as a target for abuse.

Radio talk-show hosts Phil Valentine and Steve Gill, who had been broadcasting from positions on War Memorial Plaza, inciting the antitax protests, added Westmoreland to their daily litanies as well. "Wee Willie," the legislator was called -- and worse. Every possible connection was suggested between his apparent transgressions and his intended vote for the Naifeh bill.

The tragic denouement is well known. Westmoreland, unable to bear the shame and ridicule, went home to Kingsport on a Wednesday night and fired a rifle blast into his heart. After a day of heartfelt tributes from his colleagues in the House, the legislature suspended activity for a week.

Nobody would mention the fact publicly until the Speaker, somewhat diffidently, cited the decisive importance of the event in his Fourth of July post-session press conference, but even back in June, the vote-counters knew that the concept of a state income tax -- or "tax reform," as its PR-conscious proponents had taken to calling it, lumping end and means into a common syntax -- had probably perished along with Westmoreland.

It was not just a vote that was lost. So was Westmoreland's influence among a small group of legislative pals who had been teetering on the brink of decision. And momentum was lost too, especially since the two most prominent gubernatorial candidates, Republican Van Hilleary and Democrat Phil Bredesen -- "knuckleheads," as state Rep. Larry Miller, a Memphis Democrat, called them -- continued to vie with each other in their Tweedledum-Tweedledee denunciations of an income tax.

In the immediate aftermath of Westmoreland's death, two other pro-income-tax House members were hospitalized -- Memphian Barbara Cooper and veteran legislator Shelby Rhinehart of Spencer, both Democrats. Cooper could be sent for if her vote looked to be decisive, but Rhinehart was said to be gravely ill. Naifeh had succeeded in turning the votes of one or two undecideds, but every step forward for him was accompanied by a setback. It seemed as if the fates themselves had washed their hands of the problem.

So it was that other plans began to be talked up as alternatives to the draconian budget-slashing alternative which the House leadership had prepared in case no revenue-enhancement plan could be agreed upon. "DOGS" it was called, for "Downsizing Ongoing Government Services," and it -- or something like it -- would have to be imposed if no source of new revenues could be found, House Finance Committee chairman Matt Kisber and the plan's other sponsors warned.

And the warnings were underlined by ongoing committee hearings in which this or that administration official testified as to the consequences of such cuts. Parks would be closed, school spending slashed, hospitals shut down, whole departments of government, such as the departments of Tourism and Economic Development, would be abandoned. And, ominously for all city and county governments, the various "state-shared revenues" on which they had come to depend for their own budgets would be eliminated.

As critics of the DOGS ploy suggested, it may have been slightly overdrawn so as to dramatize the enormity of the situation, and the cartoonish nomenclature of the plan reinforced that notion. The reality, however, was bad enough. Almost half a billion dollars would need to be cut from current expenditures merely to balance the budget for the fiscal year about to end. Another billion would have to go to cover the next year's shortfall.

The problem had been accruing for the past three years, during which public pressures and their own timidity had kept legislators from rising to the occasion. Sundquist's first business-tax proposals, in 1999, had been so stoutly resisted by a fleet of Capitol Hill lobbyists that they had to be abandoned. Though variants of the business-tax concept -- increases in excise taxes, extension of the sales tax to the professions, and the like -- continued to be proposed, they were invariably beaten down, as were significant increases in the so-called sin taxes on alcohol and tobacco.

For the last three legislative sessions, each of which had extended into midsummer, the debate had come down to sales-tax increases versus a state income tax. In the House, with its 99 seats and broader economic base, the sales tax was seen by a majority to be regressive, and an increase in what was already a high level -- 6 percent statewide, with allowances for an additional local option tax of two cents -- was regarded as anathema.

For its part, the Senate -- despite the insistence of Rochelle and the increasing prominence in the income-tax cause of Memphis legislators like Jim Kyle, Steve Cohen, Roscoe Dixon, and John Ford -- had its own built-in aversion to an income tax. The two bodies deadlocked over and over, hitting an impasse in the session of 2000 that remained until the present.

Two years ago, Sen. Jerry Cooper, a middle-of-the-road McMinnville Democrat, joked to a group of colleagues in the second-floor men's room of the Capitol that the legislature should resolve its dilemma and eliminate a shortfall by the simple expedient of raising budget estimates to balance income and expenditure. He professed chagrin when his colleagues took him seriously and adopted the idea as a basis for that year's budget.

A year later, the shortfall had worsened. Teachers' salaries and those of state employees were frozen, as were meaningful capital expenditures on education and virtually everything else, save roadbuilding, which continued unabated by virtue of its drawing upon its own dedicated fund, separate from the general budget and protected by politicians and lobbyists alike.

In July 2001, even the Senate had been brought to consider an income tax as an inevitability, and members gathered to work out a final version consisting of a flat tax and a constitutional convention or referendum, either front-loaded (i.e., to approve the plan in advance) or back-loaded (to continue it after a year or two in place). Alerted by e-mails from the anti-income-tax senator Marsha Blackburn of Williamson County, however, Gill and Valentine took to the airwaves and whetted up a crowd of protesters, who descended on the Capitol.

Their presence there that night was later described as either a riot or a patriotic demonstration, depending on the prediction of the observer, but, whatever it was, it resulted in broken windows, overflowing hallways, disrupted Senate deliberations, and, ultimately, the aborting of any tax plan whatsoever. The legislature ended by tapping its share of a national settlement from tobacco companies which had been successfully challenged in court. "One-time expenses to meet concurrent demands," as the act was accurately described in what became a catch phrase and a warning for the current year, when no such expedient was even available.

AS THE LEGISLATURE REMAINED mired in disagreement entering another July, the state's reserves had diminished to the point that -- unlike the case in the previous two years -- not even a continuation budget (i.e., a temporary extension of existing expenditures) could tide things over until something could be worked out.

The first major alternative to the DOGS budget that emerged was called -- what else? -- CATS (Continuing Adequate Taxes and Services). The brainchild of Senator Doug Jackson (D-Dickson) and Representative Frank Buck (D-Dowellton), a rumored rival to Naifeh for the speakership, the plan was a distillation (a "hodgepodge," its critics called it) of various excise taxes, license fees, sin tax increments, and levies upon the transportation industry. It would also make the state sales-tax uniform and appropriate the local-option increases, where they occurred, for state purposes.

The plan ran afoul of the three main blocs -- income-tax advocates, sales-tax advocates, and the lobbyists who saw in its multiple amendments real threats to their clients. Moreover, the plan would raise only some two-thirds of a million dollars, not enough to ensure real continuity in state functions.

The state's venerable Senate Speaker, Lt. Gov. John Wilder, assisted by Sen. Kyle, even got in a short-lived plug for his favorite solution -- total abolition of the state sales tax, which could not be deducted on federal tax returns, and its replacement by a 6 percent flat income tax.

No agreement had been reached on anything by midnight of June 30th, end of the fiscal year, and Governor Sundquist, just before the witching hour struck, signed an emergency "essential services" bill that furloughed half the state work force and provided for five more calendar days of limited government, after which a total shutdown would occur.

Almost wistfully, the Republican governor -- reelected by a landslide in 1998 but the object of vilification in his own party since his tax-reform initiatives began shortly after his reinauguration -- had made his own last proposal. Though based on the income tax, it too was a hodgepodge, and it was ignored.

INTO THE BREACH WOULD ULTI- mately come the same Jerry Cooper whose bathroom joke had inadvertently determined policy two years earlier. With Naifeh's flat-tax proposal having been vetted out last time and found still to have insufficient votes, the governor and legislative leaders met to consider the latest "Cooper Plan," this time a formal proposal which carried the promise of raising a billion dollars, enough to fund all recurring state functions, at least on a maintenance level, and to provide modest raises for teachers and state employees as well. Sundquist and Naifeh capitulated. With two days until its scheduled execution date, Tennessee state government got -- if not a full reprieve -- a stay. Sundquist made a point last Wednesday of wandering into Legislative Plaza where, as soon as he drew a crowd of reporters and other onlookers, he announced that he and legislative leaders -- presumably including both Naifeh and Wilder, who had feuded bitterly during the last week or so of impasse -- had agreed on the "concept" of the Cooper Plan.

The governor's mood was clearly one of resignation. "It's not a long-term solution," he said. "Those who follow us are going to find out it's a problem they're going to be facing next year . I would hope the momentum for tax reform would go forward." Wanly, he described the outcome as "my last shot." He said, "The missionary work we've done will lead to real tax reform in the future ... . You have to deal with reality. And that is, we're facing a shutdown. Friday night, at midnight, we came close. Two nights ago. We can't tolerate that."

The decision by Sundquist to give up at last and forgo his plans for tax reform obviously came hard for him. "We've been trying for three years to do something about this," he said. His glum looks brightened only a little when Cooper happened by. "Governor," the senator said cheerily and flashed Sundquist a thumbs-up.

Sundquist brightened up a little more in subsequent hallway conversations with senators Ford and Cohen, both of whom had been dependable allies during his long and finally unavailing struggle.

Minutes later, Naifeh followed suit, declaring in a speech from the House podium, "In this state right now, the income-tax/tax-reform bill does not have the votes. We cannot pass it ... . We've got to pass a revenue measure. We've got to help those people who cannot help themselves. We need to get that common bond back together. No more this side and that side. No more being held to vote for this thing or that thing.''

Linda McCarty, director of the Tennessee State Employees Association, saw her constituency barely holding its own in the plan. "My horrendously overworked work force that is miserably underpaid will be asked to go home and celebrate that they're able to watch a parade," she lamented, holding on to a hope that some rescue still might occur. "They couldn't do a finer celebration of the Fourth of July than to stay here working day and night until they got a solution," she said.

On the other hand, Senator Blackburn, the bane of all taxers, found the Cooper Plan too generous. She said she was still being deluged by communications from Tennesseans who wanted to hold the tax line. "The cutest thing!" she said of one caller, who told her, "Marsha, I'm taxed out" and went on to advise, "Shut her down and come on home," the exhortation seeming to apply to the extended legislative session, not to state government itself, though Blackburn did not specify.

IN THE END THE HOUSE OF Representatives, a body whose leadership had proclaimed it would never approve a sales-tax increase, did exactly that -- on instructions of the leadership, including Naifeh, who cast the deciding vote Wednesday in a 50-41 outcome, with eight abstentions. The Senate had earlier approved the Cooper Plan by a vote of 22-11. Waiting in the wings, if needed, had been another version of CATS.

The end result was actually more foreordained than the final tally indicated. Several allies of the Speaker or of Governor Sundquist had indicated they were available for "Yes" votes if needed.

Almost as an afterthought to the week of feverish negotiation and, indeed, to the four-year crisis itself, various legislators allowed themselves to say what had previously not been much emphasized. Stripped of a veneer of other provisions, the Cooper Plan had turned out to be in essence a one-cent sales tax.

As Memphis Democrat Mike Kernell, an income-tax advocate and one of the 41 House holdouts Wednesday, pointed out in final debate, the bill constituted a 17 percent increase in the sales tax. He echoed an equally defiant Sen. Roy Herron (D-Dresden) who had made a passionate attack on the bill previously, concluding "It is always the right time to do right; there is never a right time to do wrong."

But, as with Sundquist and Naifeh before them, others submitted to reality. Dixon had noted, "I hate the sales tax. But you've got to do what you've got to do" -- a refrain echoed by Cohen, who had reluctantly moved from a position of abstention to vote for the bill. As he and others noted, the votes for tax reform hadn't been there.

Meanwhile, critics declared that the bill would push the state's sales-tax rates, when combined with those of local governments, to one of the highest levels in the nation. People with low income levels would be hit the hardest, and the higher rate would send Tennesseans across state borders or to the Internet for shopping.

The bill which was more or less welcomed by opponents of the income tax and claimed as the essence of victory was, in fact, the largest tax increase measure in Tennessee history.

ON THE MORNING BEFORE THAT last day of the session, a solitary figure bicycled furiously around the perimeter of the massive granite columns surrounding the Bicentennial Mall, down the hill from the Capitol. The Mall was completed in 1996, which happened also to be the last year free of revenue-related crisis in Tennessee government.

The cyclist was Lt. Governor Wilder, an octogenarian whose sturdy legs propelled him around the perimeter several times until, as he explained later, a total ride of 15 miles had been accumulated. It was his daily ritual. The first of the giant columns, each denoting a significant date in the state's history, bore the legend "24 Million Years Ago," and the last took things more or less to the present. Making his rounds, Wilder was whatever symbol of recurrent history one wanted. But the fact was that one cycle of things had at least been suspended.

Later on, during that last House session of 2002, several legislators, most of them -- coincidentally or not -- opponents of an income tax, went about the chamber smoking the expensive cigars left behind by the late Keith Westmoreland. Make of that circumstance what you will. But it was surely not the legacy which they matey Westmoreland intended to leave behind.


City and State

While state legislators worked on the budget in Nashville, city officials tried to minimize its impact.

By Mary Cashiola

While state employees were wondering when -- or if -- they would be going back to work last week, the Memphis City Council did something it hasn't done in at least 30 years, if ever. It met on Sunday. But even that June 30th meeting couldn't stop all the effects of the crisis.

"The attorneys recommended ways and means to buy us some time. It was all to do what was best for the citizens of this community," said council chairman Rickey Peete.

At the special session, held on the last day of the fiscal year, the usually suit-clad council members looked as if they were on their way to a ballgame or a picnic. The meeting was a last-ditch effort to give the state legislature the time it needed to approve a budget.

"The reason we had the meeting is that there were several budget plans on the table. At least one of those plans could have severely handicapped delivery of city services without increasing property taxes," said Peete. "By delaying the approval of the minutes, it gave us an opportunity to evaluate what the state was going to do and remain within the confines of the law."

The idea was that if the tax rate hadn't been approved into the minutes it could legally still be changed to cover shortfalls if the state budget allowed less for Memphis than city administrators expected.

Council members were optimistic but preparing for contingencies.

The meeting lasted all of 20 minutes. As everyone knows by now, the state reached its decision --a budget funded by the largest overall tax increase in Tennessee history -- on July 4th after a furlough of nonessential workers. But because that plan still wasn't in place at the council's first regular meeting of the month July 2nd, the council once again delayed approving the minutes until July 16th.

Council vice chair E.C. Jones, reached by phone earlier this week, said that the state's lack of a decision put something of a strain on the council. "By not setting the tax rate, it was going to cost us interest that we would have received off the moneys that people had paid in property tax. The longer you delay that, the more it costs in interest that we could earn from those tax collections," Jones said.

Because the tax rate has not been approved into the minutes, the city has not yet been able to bill those who owe property taxes. "We take in about $400 million a year," said city finance director Joseph Lee. "A portion of that is related to various taxes. Those continue to flow in. In billing out property taxes in this case, we're about three weeks to a month behind."

Last year, the city took in about $18 million in property taxes in July and $169 million in August. With the delay in adopting of the minutes and current low interest rates, the city is looking at about $100,000 lost in interest per week.

"That's $400,000 that we could not be realizing in interest," Lee said, adding that the numbers are fairly rough and the greater portion of the money doesn't come in until the end of the month. "There is some impact, but out of a $400 million budget, $400,000 is not that significant. It's real money, but it's only a small percentage."

Still, this is a much better scenario than what the council members found themselves facing at the end of June. With funding still up in the air, Lee presented them with six possible alternatives to get the city budget on track should the state pass a restrictive budget. The options included cutting all positions currently open, varying property-tax hikes, and even draconian cuts to city services.

Asked about the feasibility of budget cuts in the beginning of the new fiscal year, had it been necessary, Peete said the council could have done it, but they would have had to make sure they made good decisions even in a time crunch.

"We had to move forward. We were prepared to make hard decisions," said Peete. "The state's budget has a major ripple effect. As painful as it is for us to have an income tax, it's the fairest source of income. This will be back, and it will be bigger, hungrier, and more ferocious."

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