June 12, 2004

Tennessee Surplus Soars Again in May

With 10 months of revenue collected for the fiscal year, Tennessee's revenue surplus now stands at $277.2 million – higher than the $256 million surplus predicted last month for the entire fiscal year by state Finance and Administration Commissioner Dave Goetz.

With two more months of revenue still to be collected, the state's revenue surplus now is clearly likely to top $300 million, and perhaps reach $325 million.

According to data released Friday by F&A, May revenue collections were $37.7 million higher than the budgeted estimate for the month, powered mainly by sales tax collections that ran $27/8 million ahead of estimates. Year-to-date, sales tax collections are ahead of estimates by a whopping $144.9 million. (Read the press release.)

Overall tax revenue has grown 7.11 percent in the first 10 months of this fiscal year compared to the prior fiscal year, while revenue from the sales tax, the largest source of state revenue, has grown a very healthy 6.93 percent. (In May, sales tax revenue was 7.72 percent higher than in May of 2003, clear evidence of the strong growth of the Tennessee economy.)

The $277.2 million surplus through May means the state of Tennessee has $277.2 million more in revenue than is needed to balance the state's budget as passed a year ago by the state legislature. However, as regular readers of HobbsOnline know, the Bredesen administration is spending $163 million more this year than that budget allocated, effectively wiping out about half of the state's revenue surplus. Because that extra spending pushed the state budget above the state constitution's cap on the growth of spending, in May the legislature passed legislation to permit the state to exceed the spending cap by $105.1 million.

As I wrote several times, including here on May 19, the administration's excess spending, approved by the legislature, makes a tax increase more likely in the coming years.

The state constitution caps annual year-over-year spending growth by the legislature based on the rate of the state's economic growth, defined by statute as the rate of personal income growth. The goal is to prevent the cost of government from growing faster than the people's ability to fund it. When spending rises faster than the people's ability to pay for it, tax increases are inevitable. Unfortunately, the constitution permits the legislature to bust the cap by a simple majority vote, making a good cap easy to break.

Over the last two decades, the legislature has voted to exceed the spending cap multiple times, by a total of $3.1 billion. During the Sundquist administration, the cap was exceeded three times by a total of $1.09 billion, leading directly to a billion-dollar tax increase at the tail end of the Sundquist administration after the economy slowed.

So, what will happen to the remainder of this year's large revenue surplus - which could total around $150 million? Much of it was allocated to be spent next fiscal year. A little of it was saved in the state's reserve fund. But none of it was used to lower the state's sales tax rate, and none of it was returned to the taxpayers.