Friday, March 20, 2009

Rationale for FONCE exemption

Reagan Farr and Phil Bredesen believe the FONCE exemption should end. This is nothing but a tax increase and they are doing everything they can to play the wealth-envy game that Democrats love to play. They have tried to get the exemption repealed in the past and have failed. This year, they are engaging in a full-court press with the help of the media that is all too happy to play along with their wealth-envy game. This article in The Nashville Scene blog goes through a Q&A with Farr. Far states that "It's a loophole that has no underlying rationale. ... You don't create exemptions based on somebody's bloodline. ..." He goes on to inquire "how is it you can justify over 200,000 businesses competing in a commercial marketplace and paying their fair share of franchise and excise taxes when 2,600 people competing in the same marketplace benefiting from all the same services don't pay tax simply because they're wealthy or they can go into business with wealthy family members."

The answers are simple, Mr. Farr. First, there is an underlying rationale for not taxing those entities. Tennessee does not have a state income tax other than the Hall Tax on interest and dividends. If an individual or a family buys a rental property in their own name, they do not pay any Tennessee income tax on the property. If they decide to pay Tennessee $300 per year for an LLC, they can gain more assurance of limited liability, but how much do they truly gain? If they have insurance on the property (which they will likely have regardless of whether an entity is in place), the additional protection afforded by an LLC really only comes in to play if there is a situation where the insurance company fails to pay. That is truly a rare case, but it does happen. Does it happen any more frequently than a plaintiff's lawyer attempting to pierce the entity veil to create personal liability on the part of the members of the LLC? Probably not. Absent the exemption, most people will likely just opt for higher insurance coverage limits. The $300 per year minimum that Tennessee gets from these LLCs will be lost.

Second, the fact that the exemption attracts investment in commercial property from inside or outside of Tennessee is reason enough to have the exemption. Outside investment makes these properties more valuable. It increases the availability of housing and decreases its cost. Farr and Bredesen think that is a bad thing because they would rather run up the cost of housing and decrease investments from out-of-staters so they can use the (temporary) revenue increase they "believe" they will enjoy to create more entitlements.

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