Governor Haslam signed the Improving Manufacturing, Public Roads and Opportunities for a Vibrant Economy Act (the IMPROVE Act) on April 26. Originally proposed in late January of this year, the Act includes a new transportation plan as well as tax cuts (also referred to as tax inequities).
The Act specifically lists 962 road and bridge projects across the state that will be funded in whole or in part by sources within the Act. These projects cover all 95 counties in Tennessee, with 52 percent of the projects going to urban areas and 48 percent to rural areas. These projects include safety and interstate improvements, congestion reduction, economic corridors, and the repair of 536 bridges.
Funding for these projects comes from several taxes and fees, the principal source of which is an increase in the gas and diesel tax, as well as increased taxes on certain alternative fuels. The gas tax will increase from its current rate of 20 cents per gallon to 24 cents effective July 1, 2017, then to 25 cents effective July 1, 2018, and finally to 26 cents effective July 1, 2019. Undyed diesel fuel will increase from its current rate of 17 cents per gallon to 21 cents effective July 1, 2017, then to 24 cents effective July 1, 2018, and finally to 27 cents effective July 1, 2019.
The taxes on alternative fuels will increase over the same three-year period and will impact liquefied gas and compressed natural gas. There are also additional fees and taxes imposed to increase funding, such as the $100 registration and renewal fee on electric vehicles.
The Act also includes a local surcharge provision that authorizes several counties and cities to adopt their own local surcharge for purposes of funding a local transit improvement program. The local surcharge must be approved by a majority of registered voters of the local government voting in an election on the surcharge question.
The local governments that meet the requirements to potentially adopt a surcharge are counties with populations over 112,000, according to the 2010 federal census, and any city with a population in excess of 165,000, according to the same census. Based on those population figures, the counties of Davidson, Hamilton, Knox, Rutherford and Shelby would qualify along with the cities of Chattanooga, Knoxville, Memphis and Nashville.
Under the Act, a surcharge can come in many different forms; however, any surcharge is limited to a local options sales and use tax, business tax, motor vehicle tax, local rental car tax, tourist accommodation tax and residential development tax.
There are several tax inequities addressed by the Act. These include:
- Sales tax on food: The sales tax on food and food ingredients for human consumption was reduced from 5 percent to 4 percent, effective July 1, 2017.
- Hall income tax rate: In 2016, the Hall income tax rate was reduced from 6 percent to 5 percent, effective Jan. 1, 2016. The intent at that time was to reduce the tax further over the next six years, with the tax eventually eliminated for the year beginning Jan. 1, 2022. There was no specific schedule for the eventual elimination of the tax under previous law. The only stipulation was that it would be eliminated for years beginning on or after Jan. 1, 2022. The Act provides a specific timetable for the reduction in the Hall tax as follows: 4 percent for tax years beginning on or after Jan. 1, 2017; 3 percent for tax years beginning on or after Jan. 1, 2018; 2 percent for tax years beginning on or after Jan. 1, 2019; 1 percent for tax years beginning on or after Jan. 1, 2020; and zero percent for tax years beginning on or after Jan. 1, 2021.
- Single sales factor apportionment for manufacturers: Effective for tax years beginning on or after Jan. 1, 2017, manufacturers may elect to apportion net earnings for excise tax purposes and may elect to apportion the net worth for franchise tax purposes using a single sales factor. This election is made on the taxpayer’s Franchise and Excise Tax Return for the taxable year to which the election applies. The election remains in effect for a minimum of five years and thereafter until revoked. Once the election is revoked, a taxpayer cannot elect to use the single sales factor method again for a five-year period.
- Property tax relief for certain taxpayers: The Act also provides additional property tax relief to taxpayers over 65 years of age, those who are totally and permanently disabled, and disabled veterans whose income is less than $24,000 annually.
When comparing the tax increase from the higher fuel taxes and other fees to the tax reductions, the net result is a tax cut estimated at $270 million annually. Obviously, that estimate does not account for any local option transit surcharges that may be implemented in the future.
For more information regarding changed affected by the IMPROVE Act, please contact your KraftCPAs advisor.