Hotels, Homesteads, and Power Plants: Three Studies on Disparate Topics

Friday, February 12, 2016 | 12:04pm

Nashville, TN, February 12 – A state policy group, the Tennessee Advisory Commission on Intergovernmental Relations, has recently concluded its reports on three studies, each required by state law, that provide a glimpse into the breadth and complexity of the policy issues routinely confronted by the state and its local governments.  While the three reports cover disparate topics—lodging taxes, homestead exemptions, and payments in lieu of taxes—they each demonstrate the complex, overlapping nature of our federal, state, and local governments and how the actions of one can affect others.  The Commission’s reports are posted on its website at www.tn.gov/tacir.

The first report, Structuring Lodging Taxes to Preserve the Economy and Encourage Tourism, responds to Public Chapter 395, Acts of 2015, which directed the Commission to study the effect of hotel occupancy taxes on the economy, tourism, and the hospitality industry; compare Tennessee’s hotel occupancy tax structure with other states; and consider methods to require public input before adopting lodging taxes.

Like Tennessee, most states levy a state tax on lodging—either a lodging tax or a general sales tax or in ten cases both—and most allow their local governments to tax lodging as well.  In fact, 28 states including Tennessee allow some or all local governments both to levy lodging taxes and to apply their sales taxes to lodging.  This layering of taxes is not unusual, although allowing city and county taxes to overlap is less common.  But most states do not make these authorizations county by county and city by city.  Twenty-one grant broad authorization in general law for all local governments to levy lodging taxes, and seven others broadly authorize either cities or counties to levy lodging taxes.  Most cap the rates, but a few allow rates to be set locally including a handful that require referendums.  Only five require public hearings on lodging tax proposals.

In the report, the Commission says that although there is little evidence that Tennessee’s economy or the tourism and hospitality industries are adversely affected by its lodging tax structure, there may be other reasons to reduce its complexity.  Advantages and disadvantages are discussed, as are options such as granting general authority up to some maximum rate, with or without an earmark, in order to reduce the number of individual requests that come to the legislature each year.

The second report, Tennessee’s Homestead Exemptions: Adjusting Them to Reflect the Cost of Living, responds to Public Chapter 326, Acts of 2015, which required the Commission to study the homestead exemption amounts in Tennessee and determine whether they should be increased to accurately reflect the cost of living.  The act also required the Commission to compare the various categories of homestead exemptions in detail to those of other states.

Tennessee, like other states, has laws protecting certain property from the claims of creditors.  Called exemption laws, their goal is to ensure that debtors are not left destitute when they fall on hard times.  These laws protect both real and personal property.  A set of federal exemptions is available to debtors in all states unless the state has passed a law saying otherwise.  Only 19 states allow their residents to choose between the federal and state sets of exemptions; Tennessee is one of the 31 that do not.

Real property protections are called homestead exemptions and typically protect a certain amount of equity held in an individual’s primary residence but in some states protect the entire residence regardless of its value.  Whatever the amount protected, it is exempt from judgments that would otherwise allow creditors to force the sale of the debtor’s property.  Although the exemptions can be used to protect property from any judgment sought by a creditor, they are most often used in bankruptcy proceedings and were studied by the Commission primarily in that context.  In fact, debtors sometimes file bankruptcy to protect their property from other types of judgments.

In the report, the Commission takes note of the fact that Tennessee has the lowest homestead exemption of the states that do not allow the use of the federal homestead exemption and has the third lowest combined dollar value of all property exemptions—only Missouri’s and Alabama’s are lower—and estimates that Tennessee’s homestead exemption amounts for individuals and joint owners, which have remained at $5,000 and $7,500 since last changed in 1978 and 1980 respectively, would be worth $18,513 and $21,907 today if they had kept pace with inflation.  Although many attempts have been made to change those amounts, none have succeeded, but much higher amounts have been set for certain groups of debtors, including those over 62 in 2004 and those with custody of a minor child in 2007.  The report notes that a simple way to bring the amounts for other bankruptcy filers up to date and keep them up to date would be to adopt the federal homestead exemption amount, which is currently $22,975 for individuals and double that amount for joint bankruptcy filers and is adjusted for inflation every three years.

The final report, Tennessee Valley Authority’s Payments in Lieu of Taxes, is the latest in a series of annual reports prepared in response to Public Chapter 1035, Acts of 2010, which requires the Commission to monitor changes in the wholesale distribution of electric power by the Tennessee Valley Authority (TVA) and its distributors for possible effects on the Authority’s payments in lieu of taxes to the states in the valley region.

According to a press release issued by the Authority in November 2015, TVA’s actual payments for federal fiscal year 2014-15 amounted to $542 million.  The TVA payments, often referred to as payments in lieu of taxes, or PILOTs, are divided among the states based both on revenues from power sold and on the value of power-generating property owned by TVA in each state.  Tennessee governments received $353.9 million in federal fiscal year 2014-15, including $3.4 million in direct payments to counties.  This was an increase of $9 million over payments to all states in the previous fiscal year. 

The Commission says in its latest report that TVA’s estimated payments for the current fiscal year, federal fiscal year 2015-16, are $7 million below estimates for the previous year because of reduced power sales.  For the current year, Tennessee governments will receive an estimated $344.8 million, of which $3.4 million will again be paid directly to counties.  Tennessee’s percentage of the Authority’s overall payments increased slightly, mostly because TVA retired four coal-fired units at its Widows Creek facility in Alabama in July 2014, reducing that state’s percentage of the PILOT relative to other states.

In the report, the Commission also discusses circumstances that could alter the amount of PILOT revenue paid directly to states in the future, including innovative financing techniques used by TVA to manage within its $30 billion debt limit, proposed changes in the Authority’s supply system brought about in part in response to economic factors and environmental mandates, and its efforts to manage power demand by its customers.  It also discusses how other planned changes could reduce TVA’s PILOT to Tennessee as well though none have as yet.  For example, retirement of ten coal-fired units at TVA’s Johnsonville plant in Humphreys County will reduce the value of power producing property in Tennessee, one of two factors determining its share of the PILOT, unless the reduction is offset by an increase in the value of TVA property elsewhere in Tennessee or by net reductions in other states.

The Tennessee Advisory Commission on Intergovernmental Relations (TACIR) serves as a forum for the discussion and resolution of intergovernmental problems and provides high quality research support to state and local government officials to improve the overall quality of government in Tennessee and to improve the effectiveness of the intergovernmental system to better serve the citizens of Tennessee.

Advisory Commission on Intergovernmental Relations