April 5, 2007

Tennessee's Spending Crisis Update: Bredesen Administration Seeks Again to Exceed State Constitution's Spending Growth Limit

Legislation is now pending in the Tennessee General Assembly that would authorize state government to - twice again - exceed the state constitution's limit on the year-over-year growth of state spending, this time by a combined $23.5 million.

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.

From 1985 through last year, governors of both parties - Republican Lamar Alexander, Democrat Ned McWherter, Republican Don Sundquist and now Democrat Phil Bredesen - have worked hand in hand with the Democratic-led legislature to exceed the growth cap 12 times in 22 years, by a cumulative $3.275 billion. Two years ago, Bredesen and the legislature agreed to spend $275 million in excess of the cap.

This year, House Majority Leader Gary Odom, a Nashville Democrat whose main job as Majority Leader is to carry the administration's legislative agenda, has filed legislation authorizing state government to exceed the growth cap by $11.5 million in the current fiscal year (2006-07) and similar legislation authorizing state government to exceed the growth cap by $12 million in fiscal year 2007-08.

The legislation is necessary because Gov. Bredesen's budget request for next year and for supplemental spending to the current fiscal year budget exceeds the Copeland Cap.

"Does not Increase State Expenditures."
Incredibly, the legislature's fiscal review office declares that if the legislation is enacted, it "does not increase state expenditures." That's baldly untrue of course as the legislation specifically authorizes a combined $23.5 million increase in spending. Well, okay, technically the legislation doesn't actually appropriate funds, it merely authorizes extra spending, but only in the bizzaro world of Tennessee politics could legislation authorizing $23.5 million in additional spending be given zero-cost fiscal notes. (Here are links to the fiscal notes for FY0607 and FY0708).

The legislation isn't zero-cost at all. it will cost taxpayers $11.35 million this year, and $12 million next year. And the following year the allowed budget growth will be calculated on a baseline that will be $23.5 million higher than it otherwise would have been. If the rate of personal income growth in Tennessee allows for a four-percent budget growth rate that year, breaking the cap now by $23.5 million will mean the budget growth cap in fiscal year 2008-09 will be $24.44 million higher. Over ten years, a single decision to exceed the cap by $23.5 million could cost taxpayers as much as $284 million.

Incidentally, the state constitution was amended in 1978 to limit the rate of growth in state spending to the growth of rate of the state's economy because the growth rate of the state's economy is a good proxy for the ability of taxpayers to keep up with the spending growth.

When the state budget grows faster than the growth rate of the state's economy, tax-rate increases are inevitable.

You can learn more about the Copeland Cap in Spending Spree: The Bipartisan Assault That is Killing The Constitutional Cap on the Growth of Tennessee's State Budget, a research paper I wrote in 2005 on the failure of Tennessee's constitutional limit on spending to actually reign in spending. The six-page paper also makes some basic proposals for reform that would strengthen the cap, slow the runaway growth of the Tennessee budget, and make future tax increases less likely.

Up In Smoke
Meanwhile, the legislature continues to consider Gov. Bredesen's request to increase the state's cigarette tax, and also proposals to reduce the state's sales tax on food. State Rep. Beth Harwell, R-Nashville, has sent out an email with some thoughts about the governor's cigarette tax proposal and his reluctance to cut the state's high sales tax on groceries despite the state's large and rapidly growing revenue surplus. Her letter sent to constituents and supporters is in the extended portion of this blog entry.

Harwell writes:

This communique is dedicated to financial matters - simply stated...how much money the State is spending versus the amount of revenue being collected. I would like to give your some financial data that lets you know a few of the issues with which we are struggling and my stand on those issues. Your thoughts and ideas would be valuable.

From the beginning of this legislative session, Governor Bredesen made the 40 cent cigarette tax hike a centerpiece of his legislative agenda. In his State of the State Address, the Governor explained that the extra revenue would be dedicated to education. As a part of this debate, some legislators sought a rollback of the State sales tax on food, a move the Governor initially opposed.

Governor Bredesen argued that the State cannot afford the loss of revenue a reduction of the sales tax on food would produce. Indications are that citizens favor a cigarette tax increase, however, I agree with a majority of Tennesseans who prefer a reduction of the state's food tax, one of the highest in the nation. As a proponent of the reduction on sales tax on food, I contend the Bredesen administration has benefited from the largest revenue surplus in the State's history, and if ever there was a time for the General Assembly to seize upon the opportunity of giving the citizens tax relief, now is that time.

Thus, there is discussion of imposing the cigarette tax hike while lowering the sales tax on food which would result in a revenue neutral swap, certainly, a measure that has merit. During the 2007/2008 fiscal year, it is estimated that the Rainy Day Fund will reach an all-time high of $533.5 million, with the cigarette tax accounting for $11 million of that amount -- a $37 million increase.

As legislators continue to examine these issues, please keep in mind the following factors:

1) Over the past five years, State revenues have increased by 39%, while expenditures increased 57%. Currently, Tennessee is spending over $50,000 per minute, an amount that is more than the average annual income of a Tennessee family;

2) There is an anticipated natural revenue growth of nearly half a billion dollars; and

3) If there were a rollback of food tax by half a cent each year, the State would recognize a revenue reduction of $38 million per year, which is less than 10 percent of anticipated revenue.

Obviously, there must be a focus on two budgets - the budget for the State and the individual budgets of Tennessee families. The question becomes whether Tennessee is confronting a revenue problem or a spending problem. The answer--we have a spending problem that must be brought under control. As always, I would greatly appreciate your input. After all, this is YOUR money. The members of the General Assembly are stewards of that money.

To put that in more personal terms, the current state budget costs every man, woman and child in Tennessee about $465 per capita more than it otherwise would if the Copeland Cap had been strictly adhered to. That's more than $1,850 per year for the average Tennessee family of four - around $150 per month.

To finance all that excess spending the legislature and every governor since 1985 has had to increase the sales tax and/or other taxes. A state budget that consistently grows faster than the personal income of the Tennesseans who foot the bill makes future tax increases inevitable.

Tennessee state government is on a spending spree and has been for more than two decades - and taxpayers have been hit with higher and higher taxes to pay for it. Now Gov. Bredesen is asking for a big cigarette tax increase in order to fund even more spending.

The legislature ought to pass a reduction in the sales tax on groceries instead, and force Gov. Bredesen to reduce his spending proposal to "pay" for it.

Cutting the six-cent sales tax rate on groceries by half a penny would require Gov. Bredesen to trim his budget request by 0.14 percent, or $39 million. But Bredesen's budget proposal already envisions exceeding the constitution's spending growth limitation by $12 million next year, on top of $11.5 million this year.

A half-cent tax rate reduction and a $39 million spending-growth reduction is not enough.

Not nearly enough.