May 3, 2006

Tennessee's Surging Tax Surplus

Democrats Move to Break Spending Cap to Spend Surplus
The Associated Press reports that "economic analysts told the State Funding Board Wednesday Tennessee will have a large surplus this budget year because of a strong economy." The story continues:

University of Tennessee economist Bill Fox told the state funding board that he expects the state to have $116 million more than expected when the budget year ends on June 30th. Legislative analysts say the surplus could be as high as $158 million dollars. The difference between the two is in corporate tax collections, which analysts call "volatile."

On April 11, the Tennessee Department of Finance & Administration released data on tax revenue collections through March, the eighth month of collections for the fiscal year. With fully a quarter of the fiscal year to go, the state was already running a general-fund surplus of $103.1 million more than the budgeted estimate, powered by a $61.4 million surplus so far this year in sales tax revenue - and F&A estimated the full-year general-fund surplus would reach $177.4 million.

The AP says that "how to spend the extra tax collections is likely to become a contentious issue, as Governor Bredesen has indicated he wants to use some money on his Cover Tennessee health care initiative and primary education. Senate Republicans have moved spend more than $70 million on the state's highways and higher education."

Is anyone thinking, perhaps, of not spending the surplus? Of saving it in the rainy day reserve fund? Of using it to lower the sales tax on groceries? Anyone? Bueller?

Apparently not.

At least some of the surplus tax revenue can not be spent unless the legislature decides to exceed the state constitution's cap on the annual growth rate of state spending for the 14th time in 22 years.

The state constitution limits the year-over-year growth of state spending to the rate of economic growth in the state, and has done so since voters approved an amendment in 1978 authored by then-state Rep. David Copeland. But the Copeland Cap, as it is called, has a giant loophole: The legislature can simply pass a law designating the dollar amount and percentage by which they can exceed the cap, rendering the cap toothless. And they don't need a two-thirds majority to exceed the cap - a simple majority, the same number of votes needed to pass the budget, will do.

And, just today in the state legislature, action was taken to begin that process.

Two bills, which combined would permit the state to exceed the Copeland Cap by $10.8 million this fiscal year and $11.2 million in fiscal year 2006-07, which begins July 1.

House Bill 4029, sponsored by state Rep. Kim McMillan, D-Clarksville, and its companion Senate Bill 3910, sponsored by state Sen. Jim Kyle, D-Memphis, and state Sen. Doug Henry, D-Nashville, which would permit the state to exceed the Copeland Cap by $10.8 million this year - if the amount is not increased via a future amendment - was placed on the calendar today for the next meeting of the Senate Finance, Ways and Means Committee (May 9).

House Bill 4030 and its companion Senate Bill 3911, with the same sponsors, would authorize the state to exceed the Copeland Cap by $11.2 million next year. That legislation also was also placed today on the Finance committee's calendar for May 9.

Both bills can be amended to permit even more over-the-cap spending.

While the sponsors of those bills are all Democrats, exceeding the Copeland Cap has been a bipartisan project over the years. Since 1985, governors of both parties - Republican Lamar Alexander, Democrat Ned McWherter, Republican Don Sundquist and Democrat Phil Bredesen - have worked hand in hand with the Democratic-controlled legislature to exceed the growth cap 13 times by a cumulative $3.275 billion. Two years ago, Gov. Bredesen and the legislature agreed to spend $275 million in excess of the cap.

You can read more about the flaw in the Copeland Cap that has cost Tennessee taxpayers billions of dollars since 1985 - and how it can be fixed - here. Also, state Sen. Jim Bryson, the leading candidate for the Republican gubernatorial nomination, has proposed a constitutional amendment to repair the Copeland Cap. It also is on the agenda for next week's Senate Finance committee (on May 9). Sen. Henry is considered the swing vote, but as today's news shows, he's likely not going to look kindly on proposals to not spend surplus tax revenue.

UPDATE: May 4 update here.