States Brace for Cigarette Backlash
By DAVID CRARY
AP National Writer
NEW YORK (AP) — As state after deficit-ridden state ratchets up cigarette taxes, authorities are bracing for some unwelcome consequences in the form of more aggressive smuggling and bolder use of the Internet as a tax-evading tobacco shop.
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Never before have so many states — 17 this year alone — approved cigarette-tax hikes in such a short time. Anti-smoking advocates call it a win-win situation, enabling states to reduce smoking and budget deficits simultaneously.
In many legislatures, even tax-averse conservatives have supported the increases — expected to generate $2.2 billion annually in new revenue — as budget woes and anti-smoking militancy transform cigarette buyers into America's easiest-to-tax constituency.
With prices as high as $7 a pack in New York City, and more than $4 in many states, some smokers are trying harder than ever to quit. Those unwilling or unable to kick the habit are left with several options — legal, quasi-legal and illegal — for getting a nicotine hit without a tax hit.
Those who choose the illegal route are often successful. The Bureau of Alcohol, Tobacco and Firearms estimates state and federal authorities lose more than $1.5 billion annually in evaded cigarette taxes.
The ATF concentrates on major interstate smuggling — operations involving at least 60,000 cigarettes. The workload has increased steadily in recent years; ATF now has about 150 active cigarette- smuggling cases.
"There's no question some large-scale organized crime gangs are involved," said ATF spokesman John D'Angelo. "Not only are these criminals depriving state and federal governments of tax revenue, they're using their profits for other criminal activity."
The primary sources of smuggled cigarettes are tobacco-growing states with low taxes — for example, Virginia with a lowest-in-the-nation tax of 2 1/2 cents per pack, and Kentucky with a 3-cent per pack tax.
In Ohio, where the tax recently rose 31 cents per pack, officials plan to monitor the Kentucky border for smugglers, and police are being trained to check for Ohio tax stamps on packs sold at stores. A carton of name-brand cigarettes in Ohio costs about $40, compared to about $25 in Kentucky.
In Maryland, where the per-pack tax rose to $1 in June, authorities are on alert for more smuggling from Virginia. There were only five arrests in Maryland for cigarette smuggling in 1997, and more than 50 so far this year.
The Internet — which thus far accounts for only a small fraction of cigarette sales — may pose a bigger long-term threat to tax collectors than smuggling. The hefty tax hikes may prompt more smokers to order in bulk from online merchants, who in turn may resist state efforts to collect taxes.
Under federal law, online cigarette vendors are required to report the names and addresses of out-of-state customers, but the law is widely flouted.
"Most vendors aren't turning over their customer list, so the Internet is becoming a hotbed of tax evasion," said Kurt Ribisl, a professor at the University of North Carolina School of Public Health.
Ribisl oversaw a study this year that identified 195 Internet cigarette vendors, up from 88 a year earlier. He said most advertise low-tax cigarettes and indicate they won't report to any authorities.
"We're definitely unprepared right now — we don't have the tools to get the states their proper revenue," he said. "You need federal legislation, because a patchwork approach from individual states is going to bog down."
In Congress, Rep. Martin Meehan, D-Mass., is leading an effort to tighten regulation of Internet cigarette sales. Meehan's chief of staff, Bill McCann, predicted bipartisan legislation would be drafted this year aimed at enforcing existing requirements that Internet merchants block sales to minors and report out-of-state buyers.
Some states already are sending tax bills to smokers who patronized the Internet.
"They've thumbed their noses at us," said Gene Gavin, Connecticut's tax commissioner. "And they're right, because we don't do anything."
One legal complication is that many of the Internet sites are run by American Indians. Sales of cigarettes on Indian reservations are exempt from state and local taxes, and some Indian merchants contend their Internet sales also should be tax-exempt.
Larry Ballagh, a Seneca Indian from upstate New York, sells tax-free cigarettes over the Internet.
"Adults who have been smoking for a number of years, they're not going to quit smoking," he said. "But they will shop around."
Tom Ryan, a spokesman for Philip Morris USA, said the tobacco company supports a crackdown on tax evasion.
"The people really hurt by all this are the retailers who are doing business legitimately." he said. "Jobs are on the line."
John Singleton, a spokesman for R.J. Reynolds Tobacco Co., questioned whether law enforcement agencies — stretched thin by anti-terrorism duties and tight budgets — have the resources to combat cigarette smuggling.
"It's extremely profitable for those willing to break the law to drive to a low-tax state, load up a van, drive to a state with high taxes and sell them out of the back of a truck," he said.
Cigarette taxes can be a reliable revenue source for states if the taxes are "reasonable," Singleton said.
"But with taxes at what a lot of smokers view as an unreasonable level, the states aren't going to get the revenues they're projecting and will find themselves with increasingly hard-to-enforce legal problems," he said.
Eric Lindblom of the Campaign for Tobacco-Free Kids disagreed, saying every state which has raised cigarette taxes has boosted revenues despite reduced smoking and cigarette sales. He said tobacco companies highlight tax-evasion problems in hopes of swaying politicians.
"For someone who gets contributions from the industry, these arguments are used as false crutches to support their opposition to tax increases," he said.
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On the Net:
Campaign for Tobacco-Free Kids: http://tobaccofreekids.org
Reynolds Tobacco: http://www.rjrt.com/TI2/Pages/TIcover.asp
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JULY 22, 17:33 ET
IRS Regrets Tax Shelter Disclosure
By CURT ANDERSON
AP Tax Writer
WASHINGTON (AP) — The disclosure of the names of tax shelter clients in a government lawsuit against the KPMG LLP accounting firm was a mistake that should not be repeated, top Treasury Department and IRS legal officials say.
The list of names made public earlier this month included Bill Simon, the Republican candidate for governor of California as well as his late father, former Treasury Secretary William E. Simon. Other names on the list are the late stock car driver Dale Earnhardt, New Line Cinema Chairman Bob Shaye and Gary Winnick, chairman of bankrupt telecom company Global Crossing Ltd.
Critics immediately complained of IRS bullying tactics that caused people unnecessary embarrassment as the agency seeks to crack down on tax shelters, even though no law was violated by releasing the list. KPMG also complained.
In letters to the editor of The Wall Street Journal published Monday, Treasury general counsel David Aufhauser and John Williams, chief counsel at the Internal Revenue Service, said in most such cases the names of third parties are removed or the documents are placed under court seal.
Both said that should have happened in the KPMG case. Aufhauser noted the list was released by the Justice Department in support of the IRS case.
"The absence of such measures is inexcusable," Aufhauser wrote. "All future referrals from Treasury to Justice will require appropriate protections" unless there is a clear reason for disclosure, he added.
In his letter, Williams said the IRS and Justice are "working on procedures that should avoid similar missteps in the future." That letter was also signed by Eileen J. O'Connor, assistant attorney general for Justice's tax division.
The lawsuit against KPMG asks a judge to order the accounting firm to disclose more information about tax shelters promoted by the firm. The company has responded that most of what the IRS wants is protected by attorney-client or accountant-client privilege.
Over the weekend, House Ways and Means Committee Chairman Bill Thomas, R-Calif., suggested that the list was released to bolster anti-shelter forces with a splash of publicity. The committee chaired by Thomas has oversight of the IRS.
"The question of when you release names and how you release names oftentimes is not a legal question, it's a political question," Thomas said on "John McLaughlin's One on One."
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JULY 22, 23:54 ET
Calif. GOP Hopeful Shows Tax Returns
By ALEXA H. BLUTH
Associated Press Writer
SACRAMENTO, Calif. (AP) — In an about-face, Republican gubernatorial candidate Bill Simon made his tax returns available Monday for scrutiny by reporters.
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The documents show Simon earned more than $36 million in the past decade from investments with his siblings and late father, former U.S. Treasury Secretary William E. Simon.
After three months of refusing to do so, Simon said he decided to reveal the returns because they have "become a distraction in the campaign." In April, Democratic incumbent Gray Davis released his returns and challenged Simon to follow suit.
Reporters were allowed Monday to review hundreds of pages of documents dating back 11 years for 2 1/2 hours. They were not permitted to make copies or enlist the aid of outside tax experts.
Garry South, Davis' senior campaign adviser, called the limited release of Simon's tax information "basically a farce." Giving reporters two hours to pore through complicated tax documents was not full disclosure, he said.
No law requires candidates or elected officials to release their returns, but many did. Davis has released his tax returns dating to 1987.
The records made available Monday detailed the investments of a partnership formed by Simon's late father, his brother and five sisters.
Simon and his wife, Cynthia, reported more than $36 million in income from 1990-2000 and paid more than $8 million in federal taxes and $3 million in California state income taxes.
The returns show Simon declared losses from a variety of business interests from 1997 through 2000 of more than $5.4 million. The losses helped reduce his tax liability.
Simon did not disclose his 2001 taxes because he has filed an extension for that year. He paid $1.5 million in April — his estimate of his 2001 federal and state taxes, adviser Jeff Flint said.
Simon has tried to redirect criticism about his tax returns to Davis' fund-raising.
The governor has raised more than $50 million for his re-election, including millions from unions and businesses with stakes in state business.
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July 23, 2002
Bill Nudges Non-Itemizers Closer To Being Able to Deduct Donations
by Tom Herman
The Wall Street Journal
Time is running short.
Despite powerful bipartisan support, several proposed tax-law changes affecting individuals have gotten caught recently in thick congressional quicksand. But advocates still think they can rescue the bills later this summer and send them to President Bush for his signature.
Among these is "CARE Act of 2002," a bill that would make major changes in charitable-giving rules. The Senate Finance Committee has approved it, President Bush supports the general idea, and the House has approved its own version. (For background, see my column of May 14, 2002.) Even so, lawmakers say they don't know yet how soon the full Senate will vote. Advocates say the bill faces rough seas in coming months because of tricky election-year cross currents, and because it faces stiff competition from other congressional issues.
"It has a chance, but the clock is ticking," says Sen. Max Baucus, a Montana Democrat and chairman of the powerful Finance Committee.
The CARE Act is attracting close attention because one of its provisions would carve out a potential new deduction for as many as two out of every three taxpayers. Under current law, only taxpayers who itemize their deductions are allowed to deduct charitable gifts. Under the proposed new law, taxpayers who take the standard deduction, instead of itemizing, would be allowed to deduct limited amounts of charitable contributions. The new legislation would apply only to "cash" donations, which would include those made by check or credit card.
The CARE Act as approved by the Finance Committee would limit deductions for non-itemizers to as much as $250 each year, or $500 for a married couple filing jointly. The first $250, or $500 for joint returns, wouldn't be deductible. It would be effective only for this year and next year.
While debate heats up about the bill's fate, this is a good time to review some charitable-giving basics.
The rules can be surprisingly tricky. Here are just a few:
If you're not sure whether your gift is deductible, start by asking the organization. Check out IRS Publication 78, or call the IRS at (877) 829-5500. Gifts to churches, synagogues, temples and other religious organizations typically are deductible. So are gifts to nonprofit schools, colleges and hospitals. But you can't deduct gifts to labor unions, political groups, candidates for public office or chambers of commerce. You also can't deduct a gift to an individual -- only gifts to qualified organizations count.
You may be able to deduct unreimbursed expenses you pay to help a qualified organization. Examples would include the cost of driving your car 30 miles from your home to the organization, the IRS says. But the IRS also says you can't deduct the value of your time or services, such as blood donations to the Red Cross, or the value of income lost while you work as an unpaid volunteer.
Recordkeeping and substantiation rules can also be complex. For the recordkeeping requirements on a single gift of $250 or more to a charity, see my column of May 14, 2002. Keep in mind that your canceled check may seem like adequate proof of your gift, but not to the IRS.
These are just a few of the many rules. For more details, see IRS Publication 1771. For a quick overview, see IRS Publication 17, Chapter 26, which has other references.
Meanwhile, lobbying is heating up on the charities bill. Among those urging Congress to act quickly is Independent Sector, a Washington- based coalition of nonprofit groups.
"Momentum for the CARE Act is growing," said Sara E. Melendez, president and chief executive of Independent Sector. "It has achieved a broad spectrum of support throughout the philanthropic community, the Congress and the Bush administration. The CARE Act is one of the few pieces of legislation in the 107th Congress that can be passed before August."
"We've known since the beginning this bill faces an uncertain future," says Michael Siegel, a spokesman for Democrats on the Senate Finance Committee. "Our hope is that everyone -- members and the [Bush] administration -- will be able to find common ground on the charities bill to get this passed and signed into law."
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July 24, 2002
Tax Report
by Tom Herman
The Wall Street Journal
Investors Should Consider How To Turn Losses Into Tax Savings
Despite Wednesday's huge stock-market rally, investors jolted by the long bear market should be focusing on ways to turn their lemons into lemonade.
Investors still sitting on big losses may be able to transform them into hefty tax savings. Some people also should consider portfolio shifts to reduce risk and trim taxes.
Naturally, doing nothing may seem much easier. Many people may be resisting change because they are reluctant to admit defeat. Or they may be unwilling to overhaul their portfolio, or even switch investment advisers, because they assume that would create a big tax bill. With the market down so sharply, that assumption may no longer be valid.
While the tax techniques described here may help, they have important limits and restrictions. For example, one common tip is to swallow your pride, dump your losers and use the losses to offset gains or even ordinary income. But many investors may have little or no capital gains -- and in most cases, the maximum amount of net losses you can deduct from other income is only $3,000 a year.
"Many investors wait until the end of the year to determine whether they should do some tax loss selling, and then they'll do it only to the extent of capital gains plus $3,000," says Kaye A. Thomas, an Illinois lawyer and author. "The idea behind loss harvesting is that you should be looking for opportunities to capture losses throughout the year. Right now, for people investing in taxable accounts, there is no shortage of those opportunities."
Here are a few considerations:
- Financial Alchemy: Turning Losses Into Gold: There are
two basic rules. First, when you sell at a loss, you can use that loss
to offset capital gains. Second, if your losses are bigger than your
gains, deduct as much as $3,000 of net losses each year ($1,500 if
married filing separately) from your salary, interest and other income.
If your losses exceed the threshold, carry over the excess into future
years.
Thus, many investment advisers recommend that you comb through your
holdings, dump losers you think won't revive, and use those losses to
cut your taxes. This applies not only to stocks and bonds but also to
mutual funds.
Be careful not to buy the same stock, bond or mutual fund within 30 days of your sale. If you do, you will violate the "wash-sale" rules and can't deduct your loss for this year. A wash sale typically means selling a security at a loss and buying the same – or "substantially identical" -- security within 30 days before or after the sale. To avoid trouble, wait until after the prescribed period to buy the same stock, bond or fund. Or buy something slightly different. For example, you might sell the XYZ Growth Fund at a loss and use the proceeds to buy the ABC Growth Fund.
Three caveats: The capital-loss rules apply only to actual losses; paper losses don't count. Second, you can't deduct a loss on the sale of your personal residence. Third, capital-loss rules apply to your taxable accounts.
- Pick the Best Shares: Suppose you bought 100 shares of
Company X each year for several years at varying prices. Now you sell
100 shares. Which 100 shares did you sell? There are different methods
for deciding, and your choice can make a big difference on your taxes.
If you don't choose, the IRS will assume you sold the first 100 shares
you purchased. That's known as the first-in, first-out method, or FIFO.
In some cases, that might work out best for you. But in many other
cases, it won't.
Another method is to identify the 100-share block that produces the biggest tax savings for you. But if you want to choose this method, read the fine print in IRS Publication 550, available free on the IRS Web site (www.irs.gov). If your broker is holding the stock for you, one way to avoid IRS headaches is to tell your broker the particular block you're selling at the time you sell it -- and also to ask for written confirmation.
Strange as it may seem, you can't just take the average cost of all 500 shares of that stock. But you generally can use the average-cost method when selling mutual-fund shares.
- Generosity: Current law allows you to give away as much as
$11,000 a year, tax-free, to anyone you want and to as many people as
you want. The donor doesn't owe gift tax, and the recipients don't owe
income taxes on the gift.
"Because stock prices are way down now, you can give away more shares than you could before, without exceeding the $11,000 exclusion," says Blanche Lark Christerson, director in the wealth planning strategies group at Deutsche Bank Private Banking in New York City. A married couple can give away as much as $22,000 this year.
- Charitable Reminder: If you're considering donating stock or other securities to charity, donate those that have gone up in value and that you've held for more than a year, says Martin Nissenbaum, national director of personal income-tax planning at Ernst & Young in New York City. As for stock that is selling for less than you paid for it -- sell those shares, use the loss to cut your taxes, and contribute the proceeds to charity, he says.
- Become a Convert: Consider converting your traditional individual retirement account to a Roth IRA. "When you convert a traditional IRA to a Roth IRA, you're taxable on its value. So if the value is low, you have a smaller amount of income," Mr. Nissenbaum says. "And, potentially, all of the upside, if the market zooms up, will be tax-free if you meet certain criteria." To be eligible for a conversion, your adjusted gross income must be $100,000 or less, he says.
DEATH AND TAXES: Few estates exceed $10 million.
Republican congressional leaders vow to keep fighting for permanent repeal of estate and gift taxes. Critics say a fairer approach would be to raise the basic estate-tax exclusion sharply, thus eliminating the tax for all but a tiny handful of billionaires and multimillionaires. The basic exclusion this year is $1 million.
New IRS statistics show that raising the exclusion to $5 million or $10 million would kill this tax for nearly everyone. Of the 52,000 taxable estate-tax returns filed in 2000, only 1,363 were for estates worth $10 million or more.
BRIEFS: For taxpayers who got automatic extensions earlier this year, the deadline is Aug. 15. Those needing even more time can ask the IRS for an additional extension until Oct. 15. This one isn't automatic. You need a reason the IRS finds acceptable, such as missing records.
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JULY 24, 11:16 ET
EU Proposes Single Tax on Diesel Fuel
BRUSSELS, Belgium (AP) — The European Union Commission unveiled plans Wednesday to set a single rate of excise duty on diesel fuel for trucks, a measure that could cost the British and German governments billions of dollars.
Under the commission's proposals, Britain's excise duties on diesel would have to be cut by more than 50 percent over the next seven years. Germany would have to slash its rates by around a quarter.
The result would be sharp falls in the price of diesel for truckers in the two countries. But in other EU countries such as Spain, Portugal and Luxembourg, duties — and prices — would have to rise.
In a related move, the commission said it wants to raise the minimum rate of duty on diesel and unleaded gas used in cars. From 2006, Brussels wants a minimum duty of 36 euro cents per liter ($1.36 per gallon), compared to 28.7 euro cents per liter ($1.09 per gallon) now.
The measures would eliminate "serious distortions in competition" and help "protect the environment by encouraging more efficient fuel use," said Frits Bolkestein, EU commissioner for the single market. Different excise duties distort competition, giving truckers from low-taxation member states an unfair advantage, he explained.
British and German truckers are expected to cheer the plan. They have long lobbied for cheaper fuel.
But some consumers are likely to be outraged by the rise in their fuel costs.
The measure must be approved by all EU countries before it can become law. National governments are loath to give up their powers over taxation and implement measures that could lead to a loss in revenues.
Bolkestein said such fears were exaggerated. The British treasury won't lose much because their truckers were presently driving "on a teaspoon full of fuel" to the continent to fill up in cheaper gas, he said.
Some countries would lose out, he admitted. Little Luxembourg, the EU's richest country which has the lowest taxes on diesel fuel, would "lose its artificial income."
Under the proposals, EU countries must bring their widely diverging duties toward a rate of 35 euro cents per liters of diesel by 2010. At present, an EU minimum rate of 24.5 euro cents per liter applies.
British excise duty is more than twice as high, 74.2 euro cents per liter. In Germany it is about 44.4 euro cents per liter.
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July 25, 2002
GOP House Leaders to Propose Tax Breaks to Help Investors
By JOHN D. MCKINNON and GREG HITT
Staff Reporters of THE WALL STREET JOURNAL
WASHINGTON -- Republican House leaders are planning to offer a set of tax breaks and other changes to help individual investors who got burned in the recent market meltdown, in a bid to regain the upper hand in the debate set off by corporate scandals.
The move reflects the rising concern among GOP leaders that investors - - particularly those depending on securities for the near term -- will blame business-friendly Republicans for their losses.
Just this week, House Republicans were forced to abandon efforts to weaken a big corporate-governance bill backed by Senate Democrats. Now, they are hoping to win voters' confidence with tax breaks aimed at middle-income families.
The proposals could become part of the next round of reforms -- including pension protections and a tax-shelter crackdown -- that Congress will take up when it returns from its August recess.
The biggest of the changes House Republicans are considering would expand existing tax write-offs for individuals' investment losses. Currently, taxpayers can deduct their capital losses to the extent of their capital gains, and also can deduct as much as $3,000 more of capital losses, analysts said. Republicans are examining plans to double or even triple the $3,000 cap, and allow investors to use more of their losses in other tax years, according to a senior GOP aide.
Another change under consideration would waive a rule that forces investors to start withdrawing from some retirement accounts when they reach a particular age. Currently, for example, people with 401(k) accounts must start making withdrawals at age 70½. House Republicans are considering lifting that restriction.
Another change would make more money available to a government fund for defrauded investors.
Republicans also are being pitched on ideas to cut capital-gains tax rates for new investments in the markets, but haven't yet taken them up.
Congressional Democratic analysts said the plan is skewed to help wealthy investors. For example, they pointed out the change to 401(k) plans would help only well-to-do people who don't need money from their investment accounts.
The push by GOP leaders to take additional action reflects the tenuous position of the party heading into the fall campaign for control of Congress. "You get a gold watch for what you've done," said one Republican leadership aide in the House familiar with the plan. "You get re-elected for what you're going to do."
The nascent tax initiatives also dovetail with a broader effort, expected from the White House and GOP leaders in Congress, aimed at bringing pressure to bear on the Democrat-controlled Senate to act on legislation that would help protect the pensions of workers at scandal- plagued companies. In the wake of the Enron Corp. collapse, the House in the spring approved a bill, modeled on a proposal by President Bush, to create new protections for pensions and give workers more flexibility to manage their retirement funds.
But the full Senate isn't going to consider its pensions initiative until September. That delay is creating a political opening for Republicans.
Ranit Schmelzer, a spokeswoman for Senate Majority Leader Tom Daschle (D., S.D.), said Senate Democrats' pension provisions are stronger than the House-passed bill. She said Republicans want to turn the spotlight away from the shortcomings of their own proposals.
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JULY 25, 14:03 ET
House OKs Health Care Tax Deduction
By CURT ANDERSON
AP Tax Writer
WASHINGTON (AP) — A tax deduction to help middle-income people defray the cost of insurance for long-term health care, such as a nursing home, won passage Thursday in the House.
The legislation, approved on a 362-61 vote, would permit the deduction for a taxpayer, a taxpayer's spouse or a dependent and it would apply whether or not the taxpayer itemizes tax deductions. The tax break would reduce federal revenue by about $5.3 billion over 10 years.
Current law permits long-term health insurance premiums to be deducted, but a taxpayer must itemize and the amount that can be deducted must be more than 7.5 percent of income when combined with all other medical expenses.
The new deduction would be limited to individuals earning between $20,000 and $40,000 in adjusted gross income and between $40,000 and $80,000 for married couples filing jointly. In addition, the taxpayer would have to pay at least half of the insurance premiums.
The bill's chief sponsor, Rep. J.D. Hayworth, R-Ariz., said the deduction would encourage more people to use private insurance to pay for such things as nursing homes and assisted living arrangements instead of relying so much on Medicare and Medicaid.
"If we don't put incentives in for individuals, our public funds will be depleted," Hayworth said.
Despite the overwhelming vote in favor, Rep. Fortney "Pete" Stark, D- Calif., said the measure would help relatively few people at great cost to the government and that it appeared designed to "bail out the insurance industry."
"It's worthless and it's a tremendous waste of the taxpayers' money," Stark said.
The bill also would permit an additional personal tax exemption, worth $3,000 in 2002, for members of a taxpayer's family who function as long-term caregivers and expand the types of expenses drug manufacturers can claim as a tax credit in testing drugs for certain rare diseases.
The legislation heads next to the Senate, where its chances are uncertain. Senate leaders have indicated there will be few tax bills passed before lawmakers adjourn in the fall.
————
The bill is H.R. 4946.
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On the Net:
Congress: http://thomas.loc.gov
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JULY 26, 16:58 ET
Taxes at Issue in Tenn. Gov. Race
By DUNCAN MANSFIELD
Associated Press Writer
KNOXVILLE, Tenn. (AP) — Republican Gov. Don Sundquist's flip-flop in favor of a Tennessee income tax has cast a long shadow over the state's race for governor.
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The income tax did not pass, and Sundquist is not even running, because he is barred from seeking a third term.
But practically every major candidate for governor — Democrat and Republican alike — has come out against the income tax. And GOP front- runner Van Hilleary has gone so far as to assure voters that, unlike his fellow Republican Sundquist, he will not change his mind once in office.
The four-term congressman pledged: "I will vigorously and actively oppose all efforts to impose any tax on the wages or earnings of the people of Tennessee."
Sundquist fell into disfavor with his party and the public after campaigning against an income tax and then changing his mind a year later. His tax reform push produced a heated three-year standoff in the General Assembly, which ended in July after a partial government shutdown and the passage of the highest sales tax in the country — nearly 10 cents on the dollar.
Six Democrats and five Republicans are competing to succeed him.
"In that race there is only one issue — the unpopularity of a state income tax and Gov. Sundquist for supporting it," said Larry Sabato, a political scientist at the University of Virginia.
Former Nashville Mayor Phil Bredesen, who lost to Sundquist in 1994, is favored to win the Democratic nomination on Aug. 1. Hilleary was at one time the expected GOP nominee, but Jim Henry, a former state legislator and state GOP chairman, has made the race a tight one.
Others in the race include Democrats Charles Smith, former state education chairman, and Randy Nichols, a district attorney in Knoxville; and Republican Bob Tripp, a minister. Only Nichols has publicly supported an income tax.
Hilleary, 43, uses the issue to separate himself from Henry by branding him "Gov. Sundquist's candidate." (Sundquist has said he would vote for Henry, who said he opposes an income tax personally but would hold a constitutional convention and let the voters decide.)
All the candidates consider the sales tax increase a Band-Aid fix to the state's financial problems, which are tied to Tennessee's heavy reliance on sales taxes. But the candidates have offered few solutions beyond better management of state government and further cuts in spending on health insurance for the poor.
Bredesen, 58, who as mayor brought professional football and hockey to the state, points to his experience as a businessman who built a health care management company into the nation's second-largest before he sold it 1986 for $47 million.
Bredesen's image as a rich, buttoned-up, Harvard-educated Yankee who moved to Nashville nearly 30 years ago hurt him in his first run for governor. This time, he is attending community meetings and chili suppers and has talked about his working-class upbringing in rural New York and his love of fishing and hunting.
Hilleary, a Gulf War veteran and former executive of his family-owned textile business, rode the Republican wave to Congress in 1994 and established himself as conservative leader on defense and reducing the size of government.
"When you've got a Republican governor pushing for a state income tax and a Democrat opposing it, I thought, boy something is wrong with this picture," said minister Paul Hughes, 51, who supported Sundquist in the past but is voting for Hilleary now.
Can the candidates' anti-income tax positions be believed?
"You have to remember this is the same audience that heard Sundquist say, 'No income tax,'" said voter Judith Parker, 53, attending a GOP rally in Knoxville. "So I'm not sure we ought to buy what they say before then. I am not sure that anybody can believe in everything they are saying."
Sundquist and his turnaround on the income tax have "cast a shadow over the campaign," Vanderbilt University political scientist John Geer said.
"The bottom line is that every candidate in some sense is going to be dealing with it because that was, to a lot of people's perceptions, a broken promise," he said.
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On the Net:
Phil Bredesen: www.bredesen.com
Van Hilleary: www.vanhilleary.com
Jim Henry: www.jimhenryforgovernor.org
Randy Nichols: www.nicholsforgovernor.com
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JULY 26, 21:54 ET
Democrats Get Win Against Tax Havens
By CURT ANDERSON
AP Tax Writer
WASHINGTON (AP) — Democrats won an unexpected victory Friday night in their campaign-season effort against corporations that relocate their headquarters to tax havens such as Bermuda, often reducing their U.S. taxes by millions of dollars.
During consideration of the bill creating a new Homeland Security Department, Democrats used a parliamentary maneuver to attach language sponsored by Rep. Rosa DeLauro, D-Conn., barring the new agency from entering into contracts with publicly traded companies incorporated in 10 tax havens.
Republicans initially opposed the measure, but once it appeared likely to pass more than 100 lined up at the speaker's podium to switch their votes. After reaching 205 votes against at one point, the measure eventually passed by 318-110.
Although limited in scope, Democrats were gleeful about the vote, saying it presages more victories on the issue of corporate relocations to tax havens. The issue is one of several that Democrats are pushing ahead of the November elections to highlight corporate ethics and wrongdoing.
"This is a victory for patriotism and the American taxpayer," said Rep. Richard Neal, D-Mass. "This is seismic ... This issue is resonating across the country."
The tax haven countries are: Bermuda, Barbados, the British Virgin Islands, Cayman Islands, the Bahamas, Cyprus, Gibraltar, the Isle of Man, Monaco and the Seychelles.
Stock of the companies barred from contracts must be mainly traded in the United States, and the president can waive the prohibition if the contract is needed for national security reasons.
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