May 9, 2002

The Revenue Liars

The State Funding Board has issued its "forecast" of revenue for the next fiscal year, and it is a dire forecast indeed. The Funding Board says revenue from the existing tax code will grow 1.8% to 2.3% in the fiscal year that starts July 1. Pro-income tax legislators, naturally, are saying this is one more reason we need a big tax increase in the form of "tax reform" that includes a state income tax. Pro-income tax newspapers like the Tennessean are playing along with headlines like "State revenue projections take nosedive."

Some facts you need to know about the State Funding Board:

1. It is an executive-branch board, of which the governor is a member.
2. The Funding Board only hears from three economists hand-picked by the administration, which routinely ignores other in-state academic economists at state universities who have equal or better qualifications but also oppose the income tax.
3. The Funding Board's projections are never right.
4. The Funding Board' projections were routinely well below actual revenues, right up until Gov. Sundquist started pushing for an income tax.
5. Low projections served the administration's purpose in the early years of the administration because every dollar of revenue above the projected revenue was a surplus - which the administration declared to be "unbudgeted dollars" and promptly spent without getting the Legislature to pass an appropriations law (in apparent violation of the state constitution, but that's another issue for another time.)
6. For the last two years, the Funding Board - whose agenda and meetings are controlled by Sundquist's finance commissioner, has issued high projections and revenue came in lower, producing an artificial "shortfall" that the administration was able to use to argue for a tax increaase, preferably in the form of an income tax.
7. The new ultra-low projections - which predict revenue growth much lower history indicates is likely in the first year after a recession - were issued just before the Legislature is to consider Speaker Jimmy Naifeh's income tax plan. A low projection now serves the administration's ongoing efforts to create the appearance of a crisis so dire that an income tax is the only answer.

Some of the spending the administration proposes includes a $112.9 million increase in the state's "rainy day" reserve fund, which makes no sense because the current tight budget is precisely the kind of situation for which the reserve fund should be spent, and a large pay raise for state employees.

The amount of the pay raise (in the first year) is roughly the same as two percentage points of revenue growth. Given that the State Funding Board's projection is most probably low by a significant margin, the smart course of policy would be to cancel the pay raise and instead include in the budget a provision that any growth above 2.3% to 4.3% - roughly $155 million in surplus revenue - will be dedicated to an end-of-the-year bonus for state employees.

But such ideas aren't on the table right now. An income tax is - and the State Funding Board, undeniably an arm of the pro-income tax administration, has issued what appears to be a politically-motivated forecast of very low revenue just in time for its announcement to have maximum political impact.