December 10, 2004

Commission Proposes Income Tax - and Spending Reform?!?

Surprising absolutely nobody, the Tennessee Tax Structure Study Commission's tax reform recommendation, being released today, calls for a state income tax.

Gov. Phil Bredesen said he plans to read the commission's report "with respect" but said he does not feel bound by it, especially since it was created before he became governor. "I'm not really interested in reopening this whole divisive tax issue,'' Bredesen said.

"We've balanced the budget just fine the last couple of years, and we'll balance it fine this year with the resources we have. I'm committed to the notion that we've got to act like a family and learn to live within a budget," the Democratic governor said.

According to the article in today's Tennessean:

The recommended plan also calls for the imposition of accountability measures, such as capping tax growth so it does not exceed population and inflation growth. Also, any surplus would be put into the Rainy Day fund or refunded to taxpayers.

In the January 30, 2003, Tennessean, I wrote:

Few Tennesseans really like the current tax code, with its sales tax approaching 10 cents. But income tax proponents tried to impose a new tax on top of a system Tennesseans don't like, run by a legislature they don't trust. Imagine if instead they had proposed a constitutional amendment that would replace permanently the state's sales tax, franchise and excise taxes, investment income tax and ''death tax'' on inheritances with a simple, flat-rate 4% income tax - which would bring in about the same amount of revenue.

Such a plan would make Tennessee the most business-friendly state in the nation. Employers would flock here and entrepreneurs would flourish. The state would see revenue swell, as more people had jobs and incomes rose. Local governments, especially in border counties, would see a surge in their sales tax revenue, as Tennessee became a retail magnet for consumers in surrounding states.

Now imagine such a tax reform plan also included a TABOR provision like Colorado's. I believe voters would approve it - and it would boost public trust in government in two important ways.

Tennessee’s constitution supposedly limits spending increases to the rate of growth of the economy, but the legislature may exceed the limit by a simple majority vote, which has become routine. The state Comptroller’s office says the General Assembly has over-spent the cap 10 times in the last 18 years by a total of $2.2 billion.

A TABOR amendment is a tool to control spending, but liberals have little to fear from it. For one, TABOR works with any tax structure. Also, while conservatives might campaign to defeat a referendum in order to turn a surplus into a tax cut, liberals might push a referendum to spend the surplus on public education and expanded TennCare benefits – and 1.4 million TennCare beneficiaries are a lot of voters.

Liberals want a statutory income tax here, which is not permitted by the state constitution. Conservatives want no income tax and demand accountability and spending restraint. Can there be common ground?

Yes. Have this General Assembly and the next pass two constitutional amendments, which would put them on the ballot in 2006. The first would be designed by liberals and, if passed, create an income tax. The second would be designed by conservatives and, if passed, enact a Tennessee Taxpayers Bill of Rights.

If both passed, liberals would have the income tax they desire while conservatives would have a tool to keep that income tax in check. Of course, one or both could fail. That would be okay too, because the people of Tennessee would have had the final say.

Judging from the news coverage today, I suspect the Commission's recommendation is for its tax reform plan to be passed statutorily - that is, by the legislature passing a law - rather than via an amendment to the state constitution. That's problematic as the state constitution does not authorize a state income tax, a fact that has been validated by three separate unanimous rulings by the Tennessee Supreme Court.

My suggestion has always been for tax reform and spending reform to be put to the voters as constitutional amendments, and I hope the Commission agrees. We'll know soon - their recommendation is supposed to be posted online here later today. If a reform plan accommodates the concerns of both the tax reform advocates and the spending reform advocates - in other words, a grand compromise - I think voters would pass it.

UPDATE: Here's a link to today's story in the Nashville City Paper about the Commission's recommendation. The City Paper, unlike The Tennessean (and, indeed, most newspapers), allows readers to post comments online (and judging from the comments, the people aren't pleased.)

“There are a lot of people who don’t like an income tax,” said commission chairman Nelson Andrews, a former Nashville banking executive. It's mostly an emotional thing."

State Sen. Jim Bryson (R-Franklin), who spoke to the Commission this spring, is critical in the City Paper story of the presence of former state Sen. Bob Rochelle, a leading income tax proponent, on the Commission.

Bryson... said the board was controlled by "pro-income tax people" and that the recommendation was a "compromise that no one will support."

"This is not surprising they proposed an income tax," Bryson said. "The meeting I attended Bob Rochelle ran the meeting."

UPDATE: I incorrectly said The Tennessean said the final recommendation from the Tennessee Tax Structure Study Commission would be published online at the Commission's website today. What it said was the report would be available later this month. I emailed Deborah Pentecost, executive assistant to the Commission, asking for a copy, and was told, "The report is due for publication by December 31, 2004," and they'd be happy to send me one then.

When they do, I'll post a copy of it here.