Seeds of Tennessee tax system planted in fertile, farmland soil
To most people, taxes are a necessary evil

By Rozella Hardin

   Taxes -- they date back to the days of Moses, when God in Numbers 31:15 specifically ordered Moses to "levy a tax for the Lord." From there, other gifts and taxes were commanded to provide for the poor, the priests, etc. The sum of the taxes equaled about 25 percent.
   Tomorrow, Carter County voters will be faced with the decision of whether to enact a wheel tax. Some have lobbied hard for the tax, using education and schools as the prime reason for the new revenue. Others are as ardently opposed to it, saying we need to cut costs, rather than raise taxes.
   To most people, taxes are a necessary evil and are as certain as life and death. Each morning when we get up and flip the light switch, there is a tax to pay; when we flush the commode, we are paying taxes; when we brush our teeth, we are paying taxes; when we sit down at the table to drink our coffee and eat a piece of toast, we are paying taxes; when you get into your automobile to drive to work, you are paying taxes. And, if you own your home, you are paying taxes just to live there. We pay taxes on our utilities, such as lights, water, and gas; we pay taxes on our toothpaste, Efferdent, etc., our coffee and our toast, and when it comes to your automobile, you must buy tags and gasoline. This is in addition to property taxes, social security and income tax that you pay.
   The tax debate in Elizabethton and Carter County is not new. In fact, in a petition dating back to Jan. 1, 1838, apparently in the handwriting of Thomas A.R. Nelson, well-known Elizabethton lawyer at that time, 95 citizens of Elizabethton asked the Tennessee Legislature to repeal the charter incorporating the town of Elizabethton. They complained of "paying taxes without corresponding benefits."
   According to the petition, none or little was spent on the streets as most of the tax money was used "to pay recorder and constable, two very useless functionaires in a village no larger than this."
   The charter of incorporation was repealed, but about 10 years later, the matter was brought up again, when two petitions were submitted to the 1851 Legislature. City officers and 11 others advised the assembly that the "streets have been cleansed and improved as rapidly as possible."
   In another petition, 16 Elizabethton citizens conceded the principle that the majority should rule, but they claimed "the wishes of those who hold the most property and were liable to be severely taxed should be consulted at least." They pointed out that "many clever and worthy men have signed a petition" asking for the incorporation, but they "pay little or nothing but a poll tax."
   According to Frank Merritt's "Early History of Carter County," between 1810-1830, a total of $219 in taxes was paid by the county to the state treasury. Land was assessed at 12-1/2 cents per 100 acres, the 51 town lots in Elizabethton at 25 cents each, 412 free polls at 12-1/2 cents each, 155 Negro slaves at 25 cents per slave, and 10 stud horses at $14.50.
   The tax question is not only a local issue, but a statewide issue as the Tennessee Legislature debates the merits of a state income tax as a means to fund its budget.
   The seeds of the Tennessee tax system are planted in fertile, farmland soil as more than two centuries ago, as Tennessee formed itself into a state, it established a tax system that reflected the citizens' agrarian way of life.
   But as Tennessee's economy and society transformed, the tax system shifted, too. In the 1920s and 1930s, when industrialization took hold and the people clamored for popular government services, the state turned to a new range of revenue sources to fund those services, including gasoline, tobacco and sales tax. And now, some historians argue, continuing changes in the economy may force more changes in the state's tax structure.
   In the beginning, of course, was the settlement of the fresh and sometimes quite fertile Tennessee soil. Tennessee became the 16th state in the Union in 1796, and its new constitution included provisions for raising revenue from a society that lived off the land.
   The code's central feature was a "specific tax" on property. It ignored the land's value and any improvements made upon it. In doing so, writes James Thorogood in his 1949 "Financial History of Tennessee," the state gave a greater advantage to the speculative land holder than to the farmer scratching out a living.
   "To modern students of taxation it was indeed 'an appalling absurdity truly, that 100 acres of land, worth 50 cents the acre, should pay one dollar taxes, and another hundred acres, worth 50 dollars the acre should pay the same amount of tax,'" Thorogood quotes a state superior judge writing in the early 1800s.
   A constitutional convention in 1834 changed all that. It created a tax reflecting a property's value and throughout the 19th century, the ad valorem tax on property was the biggest revenue producer.
   It was a standard feature of states' tax codes at that time.
   "The general understanding in an overwhelming rural society is that the primary function of property ownership was the generation of wealth," wrote Thorogood. "Typically, if you owned land, it was a farm. Property was not for consumption; it was for production. You didn't have a home separate from your place of business."
   The state also turned increasingly to the privilege tax. By 1870, there were more than 50 businesses or activities declared as privileges and subject to a tax: Peddlers, for instance. Liquor dealers. Photographers. Race tracks. Mills. Brewers. Insurance agents. Auction merchants. Banks.
   Pastimes that the legislature frowned upon were subject to the tax, too, Thorogood said. Hence, privilege taxes on playing cards, circuses and theatrical establishments, for example.
   By 1896, there were 96 privilege taxes, a number that would continue to climb as society began to modernize. In the early 20th century, privilege taxes recognized the advent of the automobile age, wrote Thorogood.
   Garages had to pay them. So did car dealers.
   In the early part of the 20th century, pressure continued to mount on the government to provide services for an increasingly industrial economy, and the property tax, which then accounted for about half of the state's revenue, was struggling to keep up. And a longstanding perception that the state's Constitution prevented an income tax forced lawmakers to find other ways to boost revenues.
   When Gov. Austin Peay took office in 1923, he pushed hard for a reduction in the property tax rates that he considered unfair to the state's farmers. Between 1923 and 1925, new taxes were adopted to broaden the base: a corporate excise tax, a tobacco tax. And a new gasoline tax, which raised far more than was being spent on roads and was used to help fund other state functions.
   For it was a time when citizens were eager for the services that the 20th century government could provide.
   "There were enormous and broadly popular ways for the government to spend money," wrote Thorogood. "Get better roads. Get better education for your kids."
   The state emerged from the Depression and World War II with a new economy and new expectations. The state's first sale tax was just around the corner.
   The theory was that a sales tax is really best suited for a predominantly industrial economy, an economy that's built on the idea of mass production. And the great economic policy lesson of the inter-war years between 1919 and 1941 is that in a mass production society, the only way that you generate continuous profit and grow the economy is to make sure that people can buy and use mass-produced products.
   The sales tax finally took hold in 1947 during the administration of Gov. Jim McCord. Its proponents, chiefly the Tennessee Education Association, wanted the two-cent tax for schools.
   Sen. Douglas Henry, the Democratic chairman of the Senate's Finance, Ways and Means Committee, recently discussing the tax issue, said, "The education system needed more money than the property tax was able to provide. And during the McCord administration, the sales tax was sold on that basis."
   When it took effect, the state agreed that local governments could continue to levy a property tax while the state used the sales tax to "undergird the educational system."
   Since then, Tennessee's sales tax rate has climbed to become one of the country's highest. In 2000-01, over $1.4 billion of local sales tax was collected. It accounts for about 56 percent of all state tax revenue. Approximately 76 percent of sales tax revenue is spent on education according to the Tennessee Department of Revenue. Other major taxes collected by the department include petroleum taxes which produce nine percent of tax revenue, and corporate franchise and excise taxes which generate 14 percent of state taxes.
   At issue in both state and local government is the question: Are more monies needed or should we live within our means and cut services? The answer depends on who you ask.