July 30, 2004

Stop The Lies

From a story in today's Tennessean about yesterday's meeting of the Tennessee Tax Structure Study Commission, a supposedly "independent" and unbiased body that, in reality, is stacked with supporters of a proposed state income tax that narrowly failed in the state legislature two years ago:

[Commission Chairman Nelson] Andrews responded that the commission very well might recommend an income tax, but that it continued to be open-minded to any structure that would allow Tennessee to lower its sales tax and would keep pace with the economy.

Otherwise, he said, the state will encounter ''train wrecks'' every few years when expenses outpace tax revenue. He's unsure what the panel will recommend, but said he expected it to be ''fairly drastic changes'' in taxes.

Okay, can we stop the lies and deception now? The tax structure already provides sufficient revenue growth to keep pace with "the economy," meaning the growth of government costs due to inflation and population growth. Pro-income tax policymakers and commission know this, which is why they talk instead about expenses outpacing tax revenue, as Andrews did above. The truth is, the only time Tennessee faces a fiscal "train wreck" is when expenses outpace revenue because of overspending.

The state constitution allows for state government to increasing spending each year by a measure of annual "economic growth," which is defined by statute as the growth of personal income in the state. On average, that's about 5-6 percent, and the current tax structure, on average, produces about that much revenue growth each year. Some years revenue grows a little above the economic growth rate, some years revenue grows a little lower.

In years where revenue growth outpaces economic growth, the state constitution says the legislature can't spend the surplus unless it first passes a law allowing itself to spend the surplus. It's an easy loophole - the law allowing the legisture to bust the spending cap can be passed by a simple majority rather than a "super-majority" of, say two-thirds of the legislature. So if there is majority will to pass a budget that spends the surplus, there are enough votes to exceed the spending cap. This they have done, 11 times since 1984, spending a total of $3.2 billion in surplus tax revenue.

As I detailed in this January 2003 paper, it has been a bipartisan raid on your wallet.

The cap was exceeded twice during the Gov. Lamar Alexander years - by $446.1 million in fiscal year 1985, and $100 million in fiscal year 1987, and five times under Gov. Ned McWherter - $101 million in fiscal year 1989, $74 million in fiscal year 1990, a whopping $703.1 million in fiscal year 1992, and $450 million in fiscal year 1993. Gov. Sundquist has been just as irresponsible, pushing budgets that ultimately lead the legislature to over-spend the cap by $55 million in fiscal year 1997, $270 million in fiscal year 2000, and $771 million in [fiscal year 2003].

That has made a tax increase more likely. Here's why:

Every dollar spent over the cap one year means a higher baseline budget for the next year, and the next, and the next, and so on. When the legislature agreed to spend $105 million over the cap this year, it means they'll likely spend that $105 million again the next year, plus a little more to cover normal rising costs due to inflation and population growth.

Factor in a 5 percent annual increase for population growth and inflation and that $105 million becomes $110 million next year, $127.6 million in the fifth year, and $162.8 million in the tenth year.

Over 10 years, Bredesen's choice to exceed the cap by $105.1 million this year will cost you $1.32 billion in extra spending. If in any of those years the economy slows and revenue growth doesn't quite keep pace with the economy, the result is a deficit, a fiscal "crisis" and calls for a tax increase.

That is why, after several years of exceeding the spending cap by a total of more than $1 billion, Sundquist needed a billion-dollar tax increase to balance the budget.

Spending growth above the cap makes inevitable that governors and legislators will seek to pass tax increases to further satisfy their insatiable desire to spend more money.

In 1984, the same year the Tennessee legislature first voted to exceed the constitutional spending cap, it also voted to raise the state sales tax rate, which had been 4.5 percent, to 5.5 percent, effective April 1, 1984. That penny sales tax increase helped pay for $446.1 million in over-cap spending in fiscal year 1985 (July 1 1984-June 30, 1985) under Gov Alexander.

The legislature raised the sales tax again on April 1, 1992, to 6 percent, in order to pay for the $450 million in excess spending in 1993 under Gov. McWherter. The sales tax was raised again, effective July 15, 2002, to 7 percent (except on food) to fund Gov. Sundquist's request for a billion-dollar budget increase in fiscal year 2003. That budget exceeded the constitution's spending-growth cap by a record and $771 million.

If the legislature were to save rather than the surplus revenue in the years where tax revenue exceeds economic growth, Tennessee today could have: