May 15, 2004

As Surplus Soars, Income Tax Becomes More Likely

Frank Cagle argues - persuasively - that the fiscal policies of the current governor of Tennessee are pushing Tennessee toward adoption of an income tax.

Cagle, one of the most astute political observers in Tennessee, writes in a column in today's Knoxville News Sentinel that the administration and legislature, by rushing to spend the state's $256 million revenue surplus rather than use it to roll back part of the 1-cent sales tax increase passed in 2002, is setting the stage for an income tax the next time a recession causes a slowdown in the growth of tax revenue.

I know that legislators may have amnesia, but do all of us have it as well? During the 1990s, the economy was rocking along at a good clip. Tax collections in Tennessee exceeded inflation and population growth every year. What did we do? We spent it all. Then, when the recession hit and revenue did not increase, what happened? We had a fiscal crisis.

So now the economy is rocking along again, tax collections are up, and what are we doing? Are we going to spend it all again? We are not reducing the sales tax. We are not returning money to local governments. So, when the next recession comes along, we will be in a situation where revenues go flat or even decline, and we have a sales tax that is already perilously close to 10 percent.

What do we do then? We will not have reduced the sales tax, giving us a cushion for the next recession. We will have made more financial commitments by state government. We are proceeding down the same road Gov. Don Sundquist took us during the 1990s, only next time it will be worse. The sales tax is about as high as it can go.

... If we keep the sales tax near the max and we continue spending at even higher levels, ask yourself a few questions. Will we ever have another recession? If we do, revenues will decline or flatten. Will the Legislature break the barrier and institute a sales tax of 10 percent or higher? It doesn't seem likely.

What's the alternative? Why, tax reform of course. That would be a state income tax.

Cagle says "Tax collections for this year are expected to be $256 million more than last year."

No. Tax collections this fiscal year are expected to be $256 million more than the amount required to balance this year's budget, an amount that anticipated 4.5 percent revenue growth over the previous fiscal year.

Through nine months of tax collections for this fiscal year, the state has already collected $460 million more in tax revenue than it collected in the first nine months of last year, a growth rate of 7.34 percent. This year's budget was based on an estimate that tax revenue would grow about 4.5 percent.

The state collected $8.46 billion in tax revenue in fiscal year 2002-03. At the current rate of revenue growth so far this fiscal year - 7.34 percent - Tennessee would collect $9.1 billion this year, although the budget is balanced if the state collects just the estimated amount of $8.5 billion. Every dime over the estimate is surplus revenue.

In recent weeks, Tennessee Finance & Administration Commissioner David Goetz estimated the state would collected $256 million in surplus revenue. With the latest revenue data showing the surplus already at $237 million with three months to go, it is likely the surplus will go even higher than the predicted $256 million.

Cagle, or his editor, mangled the numbers a bit, but his basic point is right: The surplus should be used to cut taxes and restore state funds cut from cities and counties last year. Otherwise, the Bredesen administration and the legislature are embarking on the same spend-it-all policies that previous Gov. Don Sundquist followed - policies that lead to a fiscal crises and a four-year political war over the proposed income tax.