Dog Bites Man - Newspaper Adopts Democrat Talking Points

The Chattanooga Times Free Press comes out in favor repealing the FONCE exemption. They essentially adopt the same language of the Tennessee Department of Revenue by saying "It’s also making Tennessee a tax haven for out-of-state businesses whose owners can reconfigure their enterprises to fit the FONCE criteria." Like the Reagan Farr at the Department of Revenue and Phil Bredesen, they say it like it is a bad thing.

One could only wish that Tennessee would become a tax haven for out-of-state investors. Can you imagine the amount of economic growth that this state would experience at the expense of others. We need more reasons for people to invest their money in Tennessee, not fewer.

"Very Negligible Impact"

Reagan Farr believes that excluding FONCEs with holdings valued at less than $250K from the reposed FONCE tax exemption repeal would have a "very negligible impact". Well, except for the impact on those who still have to pay the tax if the exemption is repealed....

This issue is almost a case study of the "soak the rich" mentality of the Democrats.

Ron Ramsey and Jason Mumpower are right

The repeal of the FONCE exemption is a tax increase, pure and simple. This is yet another report that quotes Farr's "tax haven" meme and the fact that a wealthy New York strip club owner utilizes the exemption. The Democrats' approach to repealing the exemption appears to be to characterize the exemption as an unfair benefit to the wealthy and to pull in the worst-possible character they can find to personify the issue.

A Review of Reagan Farr's Report

Reagan Farr's report on the FONCE exemption can be found here. It continues the wealth-envy game I first noticed in this article that also tries to turn the exemption repeal into a morality play. Farr's report basically tries to frame the issue to address three issues "the wealthy", "fundamental fairness" and "reasonable[ness]." He probably should just say "the evil rich are taking advantage of the tax law to their benefit." Of course all taxpayers do that. There are plenty of people who are not rich who utilize the FONCE exemption. The fact is, Farr has no way of knowing the financial position of the owners of the entities. He merely assumes they are wealthy in order to set up an easier target to attack (because the Democrats have trained us for years that the rich are evil and must be stopped at all costs).

He further assumes that ending the FONCE exemption will result in more people paying the tax. That may be true in the short term, but he believes that those who do not pay the tax will opt to become "exempt obligated member entities." For those of you who don't know, that is another franchise & excise tax exemption where the members of the entity opt out of limited liability protection. They continue to pay the $300 per year to Tennessee to keep their entity in place. Farr is crazy if he thinks they will keep the entity in place using the other exemption. That exemption will work for only those entities who hold non-liability producing investments (such as stocks) or those who have the entity in place for estate planning purposes. That is likely relatively few of the entities that collect "rent" as it is currently defined.

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.

Quiz for Reagan Farr and Phil Bredesen

Q: What do Bermuda, the Cayman Islands, the Cook Islands, Guernsey, St. Kitts, Nevis and the Channel Islands all have in common?

a) Their governments saw the wisdom in turning them in to tax havens to attract outside investment.
b) You likely would have never heard of these places if they weren't tax havens.
c) Prior to gaining their status as tax havens, these places were basically third-world crapholes with few jobs and little industry.
d) After gaining status as tax havens, these places have experienced phenomenal economic growth due to the creation of jobs in the financial industry, the effects of foreign investment and an increase in tourism caused by the fact that these places are simply "nicer" to go to after the investment.
e) All of the above.

Apparently, the Department of Revenue has labeled Tennessee as the next Grand Cayman Island. Reagan Farr's report says that the family owned non-corporate entity (FONCE) tax exemption is "making Tennessee a tax haven for out-of-state, wealthy investors who want to shield their commercial property from taxes." Are they so stupid to realize that a lot of forward-thinking governments become tax havens because they WANT out-of-state investors to come to their jurisdiction to invest?

We need more tax breaks like the FONCE exemption, not fewer.