Tennessee Taxpayers Revolt

Published August 1, 2001

Tennessee lawmakers abandoned their efforts to pass a state income tax, aimed at funding the state’s government-run health care system, after protesters chanting “No new taxes” broke windows in the capitol building in Nashville on Friday, July 13.

State police locked the statehouse after a crowd of nearly 200 jammed the area outside the Senate chambers. Some of the protesters banged on the doors and broke windows; others accosted lawmakers as they made their way through hallways with police escorts.

One demonstrator hurled a rock through the window of Gov. Don Sundquist’s office while he was away from his desk. There were no immediate reports of arrests.

According to local news sources, Sundquist said after the protest, “I appreciate the right of all Americans to free speech and peaceful protest. I do not, however, approve of those who advocate violence, and I regret that occurred at the capitol.”

As news of the tax proposal filtered out of the capitol and onto talk radio programs, protesters streamed to the statehouse demanding responsible government, not more taxes. Traffic at the capitol came to a standstill as other protesters honked car horns and waved signs reading “Tax Revolt!” and “No Income Tax.”

Talk Radio Gets Legislators’ Ear

Steve Gill, a Nashville radio talk show host who helped organize the protests, told The Nashville Tennessean, “The people are passionate when they say no income tax.” He had made the tax bill a central part of his programming, doing live broadcasts of his show from the capitol and staging demonstrations against the tax bill as it moved through the legislature. A big cheer went up as word spread the senate had passed the “no new revenue budget.”

The senate, ending the longest legislative session in Tennessee’s history, voted 20-9 in favor of a budget that uses $560 million of the state’s tobacco settlement money to balance the books. The house later approved the spending plan 72-25. Sundquist has said he will veto the bill. Senate and house members had earlier met behind closed doors, with discussions apparently centering on a proposed flat-rate income tax ranging from 2.75 percent to 3.5 percent.

Tennessee—one of nine states without a broad-based income tax—has one of the highest sales tax rates in the country, at 6 percent. Local governments in the state add as much as 2.75 percent.

Income tax proponents in the legislature have tried unsuccessfully for the past three years to pass an income tax, including in special sessions ordered by Sundquist.

TennCare to Blame

The drive to fund TennCare led to the legislature’s proposal for a first-ever state income tax on Tennessee residents . . . a plan that clearly did not go over well with the state’s taxpayers.

Tennessee lawmakers have been wrestling with TennCare, the failed state-run Medicaid health care plan, ever since President Clinton’s national health care plan failed to pass Congress in 1994. TennCare acts as a single-payer health care system by virtue of numerous Medicaid waivers authorized by the Clinton administration. Notes Patrick S. Poole of the Tennessee Public Policy Institute, “TennCare covers one out of every four citizens in the state and consumes one-quarter of the state’s annual budget.”

TennCare is the largest state Medicaid program in the country. While universal coverage and single-payer proposals have gained some attention in states across the country, no other state has embarked on such a grandiose effort down those paths. Incorporating universal coverage and single-payer goals into the state’s Medicaid system has created a program difficult to maneuver, finance, and modify.

Prior to the Tax Revolt

On May 7, 2000, the Tennessee Public Policy Institute released a study of TennCare and recommendations for revising the state’s health care system.

“On January 1, 1994, Tennessee embarked on an ambitious course to fundamentally change the state’s Medicaid system,” wrote policy analyst Patrick S. Poole. “The stated intent of the new program—TennCare—was to implement a managed care system to control the runaway growth of Medicaid expenditures seen during the close of the 1980s and the beginning of the 1990s under the fee-for-service payment system. The anticipated managed care savings would then be used to expand coverage to the uninsurable and the non-poor uninsured.”

Poole continues, “To accomplish this feat, then-Governor Ned McWherter requested a Section 1115 waiver from the federal Health Care Financing Administration (HCFA) to mandate managed care for all TennCare enrollees and to allow coverage for those not eligible under Medicaid. After receiving HCFA approval, the state contracted with 12 managed care organizations (MCOs) to provide health care services to the entire TennCare population under a capitated rate payment system.”

The savings associated with TennCare’s managed care approach have been achieved not through better utilization of health care services, but rather by deliberately under-estimating the capitated rates paid to managed care organizations. The MCOs shifted their losses to health care providers, which in turn passed on those losses to the insurers remaining in the private health insurance market. The net effect has been a decline in the overall quality of health care for all Tennesseans and increased premiums.

Restructuring Underway

In February 2001, Gov. Sundquist announced a restructuring of TennCare that divides the state market into three regions. Blue Cross Blue Shield of Tennessee, the largest TennCare MCO, agreed to withdraw from the West Tennessee TennCare market in order to improve opportunities for other regional health plans.

At its peak, Blue Cross insured 645,000 lives in the state; under the restructuring, no MCO will cover more than 300,000 lives. Last December, TennCare had notified the state of its intent to leave the program entirely unless it could negotiate better terms. It sought authority to administer TennCare statewide while shifting the financial risk to the state. Under the restructuring, Blue Cross has agreed to remain with the TennCare program as a full-risk MCO.

For more information . . .

A summary of Patrick S. Poole’s study can be found on The Heartland Institute’s Web site at http://www.heartland.org/ia/julaug00/excerpt.htm.