BillHobbs.com - Blogging about politics and media from Nashville.

January 6, 2004

Sales Tax + Spending Restraint = Fewer Budget Crises

The San Jose Mercury News published a highly-interesting editorial last Saturday suggesting California state government adopt some sort of "spending restraint" - and rely less on the income tax and more on sales taxes to lessen volatility in revenues during economic cycles. Of course, that's the exact opposite of the lie told to Tennessee taxpayers during the four-year Income Tax War, when the administration of then-Gov. Don Sundquist insisted an income tax was a less volatile revenue source than the sales tax. Here's what the Mercury had to say...

One chart more than any other conveys what happened to the state budget from 2000 to 2003. The line tracks the state's revenue from taxes on capital gains and stock options. It climbs like a rocket, and drops like a bomb. Up to $17.6 billion. Down to $5.7 billion.

Those numbers underlie the budget whiplash of the past four years, which saw a dizzying rise in expenditures followed by a staggering deficit.

And they suggest two avenues of reform.

The first is to alter the mix of taxes on which the state relies, to lessen the boom-and-bust cycle in revenue. The second is to enact some form of spending cap or mandatory reserve that inhibits the state in fat years from making commitments it can't keep in lean ones.

California is heavily dependent on the personal income tax. Because the tax rates are progressive, it is heavily dependent on the income of affluent people. In 2000, households with incomes above $100,000 paid 80 percent of the income taxes, although they were only 10 percent of the taxpayers.

As the capital gains experience proved, the state can get seasick riding those waves.

One place to look for relief is the somewhat steadier sales tax -- not by making it higher, but by making it wider. The sales tax applies only to goods (and not all goods). Sales of goods are a declining percentage of the overall California economy. Since 1980, they have dropped from 50 percent of personal income to 40 percent.

Broadening the sales tax -- and possibly lowering the percentage at the same time -- to include such things as movie tickets, haircuts and car repairs would put the revenue on a more stable base.

Of course, nothing requires a state with a volatile revenue source to squander instead of to save its windfalls. But political pressure often trumps prudence. That's where some sort of automatic brake on spending can be helpful. A number of models are possible. Spending caps, required rainy day reserves, a dollar of saving for every dollar of new spending or tax cuts.

The Legislature and the governor have agreed to modest restraint, putting a measure on the March ballot to limit borrowing and require payments into a reserve.

With the wild swings of recent years, the temptation was to reach for a budget straitjacket. That didn't happen. But firmer guidance is still in order. Recently it's been abundantly clear that legislative self-discipline can't be relied on to keep California on the fiscal straight and narrow.

You can read more about the Taxpayers Bill of Rights concept here in my 17-page paper, The Case for a Real Tennessee Taxpayers Bill of Rights, which explores constitutional limits on taxing and spending and explains why the time is right for such a law in Tennessee.

Posted in Taxpayers Bill of Rights
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Comments

Meanwhile, just south of you in AL, Gov Riley and the Amendment One gang were telling us that our problems are caused by relying on sales taxes because people don't spend in downturns. Raise property taxes and income taxes instead.

Unfortunately, the voters didn't buy it. So Riley and his gang made spending cuts to hurt as many people as possible. Punish the bad voters so they'll vote our way next time!

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