August 12, 2002

Sales Tax Beats Income Tax for Revenue Growth

You have been told that an income tax would be a more stable source of revenue for the state than a sales tax, because it is more "elastic" and less susceptible to economic slumps. But in the second quarter of this year - April, May and June - Tennessee raked more sales tax revenue than it did a year ago. Meanwhile, according to this Reuters report, 36 states that rely on a personal income tax saw revenues fall in the last fiscal year

According to Reuters: Total personal income tax collections for the 36 states fell by 23 percent in the second quarter from the year-earlier period, according to a new survey of the 36 states that provided the Nelson A. Rockefeller Institute of Government with data.

But here's the kicker: the same report found that states' sales tax revenues rose an average of 1.2 percent during the quarter compared to April-June 2001.

In Tennessee, revenue from the sales tax totaled $1.0714 billion during the quarter, up 0.23 percent comapred to the same months in 2001.

If Gov. Don Sundquist had managed to put an income tax in place two years during the special legislative session in the fall of 2001, one thing is clear: Tennessee's budget gap in the just-ended fiscal year would very likely have been much larger than it was. Tennessee's sales tax didn't cause that shortfall - overspending did. But Tennessee's continued reliance on the sales tax clearly protected the state from a much larger budget gap. And, without a doubt, the horn-honkers, anti-tax activists, anti-tax legislators and talk radio hosts who successfully fought the income tax saved Tennessee from a much-worse budget crisis.