May 9, 2007

How to Spend The $1.3 Billion Surplus

As Tennessee legislators are mulling what to do with as much as $1.3 billion in surplus tax revenue this fiscal year, they might want to take a look at what their counterparts in North Dakota did in a similar situation...

Between the state's growing oil industry and robust sales tax collections, North Dakota had an unexpected $540 million to budget this session, The [Bismarck] Tribune reported. And that posed the "unique problem" of how to spend the money. (This situation may be new for North Dakota, but it's not unique in a national sense this year. A full 42 states are finding themselves with unexpected revenue as they approach the end of the fiscal year, NCSL's latest State Budget Update shows.)

North Dakota lawmakers put a lot of the money away and gave a lot of it back to taxpayers. $350 million went into the rainy day fund. And $118 million will cover property tax relief, the Tribune reported. That's no surprise to Karmen Hanson, one of NCSL's North Dakota liaisons. She calls it a "fiscally conservative state."

I emailed the spokesperson for the Tennessee Department of Finance & Administration Tuesday to inquire how much of the surplus revenue state government can spend this year without triggering the Copeland Cap provision - a key number that the mainstream media's legislative reporters haven't bothered to include in their coverage of the surplus.

As of Wednesday morning F&A has not responded.

But legislation was filed in February to authorize the state to exceed the Copeland spending limit by $11.5 million this year, a dollar amount that can easily be amended before the legislation becomes law - and no doubt will in order to allow the legislature to spend big chunks of the surplus. And you haven't heard word one out of the Bredesen administration about using any of the surplus for significant tax relief.

North Dakota is the right model - save some for a rainy day, and return some to taxpayers. Tennessee's estimated $1.3 billion surplus includes about $600 million in what is deemed to be "non-recurring" revenue and $700 million in recurring revenue - revenue that the state will earn every year. In other words, because the economy has grown more than predicted, the tax base is larger to the tune of $700 million in additional revenue this year, next year, and so on...

Let's just consider the $600 million in non-recurring revenue for a moment. It would be the height of fiscal irresponsibility for the governor and the legislature to spend that money to fund recurring programs. That leaves really only three choices: waste it on pork projects, save it in the state's "rainy day" reserve funds, or return it to taxpayers.

The $600 million in non-recurring surplus revenue is more than enough to completely eliminate the state's sales tax on food for a year. The sales tax on food is projected to bring in about $465 million in fiscal year 2007-08, which starts July 1. That would leave $135 million of the non-recurring surplus for the legislature to waste on pork projects or save for a rainy day. I'd prefer they put it in the reserve fund, but if the legislature would agree to eliminate the sales tax on food for a year, I'd be okay with them blowing the $135 million on non-recurring pork. (That's about $1 million per legislator, by the way.)

Of course, the legislature instead could use $465 million of the recurring-revenue surplus to eliminate the sales tax on food permanently, then stick the $600 million in non-recurring surplus in the rainy day fund, and still have $235 million in recurring funds for the governor's educational spending proposals.

Eliminating the sales tax on food would help all Tennesseans, but would help the poorest Tennesseans the most, while saving the $600 million in the "rainy day" fund would help prevent a tax increase the next time the economy slows and revenue growth slumps. The $235 million would still be throwing good money at a bad public education system without requiring any substantive reform, but if that's the price for getting real tax relief and a meaningful reserve fund, I'd support that compromise.