Tuesday, February 3, 2009

Just Show Me the Money


By Patrick D. Reagan, Ph.D.

The newly-minted Republican majority in the Tennessee General Assembly is faced with an unaccustomed reality: responsibility for governing, rather than criticizing those who hold that responsibility. Tennesseans, not unexpectedly, are curious about how this newfound responsibility will be implemented.

The overwhelming challenge confronting the Republican majority is certain to be the enormous budget deficit, likely to exceed $1 billion for this and next year. Gov. Bredesen will present his budget recommendations in February but he is already talking about 20 percent cuts in most departments and related functions, like higher education and health care. Reductions of this magnitude will bring real suffering and loss to millions of Tennesseans.

The nation’s economic misery is partly to blame, but so is Tennessee’s antiquated, dysfunctional, unfair, and ineffective tax system. By relying so heavily on the nation’s highest sales tax for the state’s principal revenue source, the revenue shortfall is hardly surprising. There is no doubt about the situation: Tennessee is in a horrendous budget mess.

How will the new Republican majority deal with this reality? Time will reveal all, but the first salvo is not reassuring. More than three dozen House Republicans are proposing a constitutional amendment that would prohibit an income or payroll tax. There have been similar proposals in the past but they have never passed the General Assembly. One can hardly imagine a worse time to resurrect this horrible idea. Where’s the money to run the state government supposed to come from? It’s simply a matter of “Just show me the money!”

We already have the highest average state and local sales tax in America, ranging from 9.25 percent to 9.75 percent in some counties. And this is the sales tax that currently is falling about $1 billion short.

Are we then to crank up the sales tax even higher, to over 10 percent, driving more business to other states, leaving the state even more vulnerable to deficits in the future, shortchanging our schools, roads, universities and community colleges, economic development, environment, and health care and extracting an even higher portion of state revenues from those citizens least able to pay? And what do we do five years later when the 10 percent sales tax falls short?

The truth is that this proposal will place Tennessee on a certain path, leading inevitably, within a decade or so, to a 15 percent state sales tax. The catastrophic impacts of this situation can scarcely be imagined.

As a colleague remarked to me recently, the anti-income tax constitutional amendment is like seeing a wall of fire in the kitchen, and instead of grabbing a fire extinguisher, you lock the door and start nailing the windows shut.

With the $1 billion shortfall, there are some short-term fixes we can take such as closing tax loopholes that make it possible for some businesses to shift their taxes onto someone else. Several hundred million dollars of tax revenue can be captured by closing just a handful of the most outrageous tax give-a-ways. Also we can repeal sales tax exemptions in Tennessee that reflect lobbying skill more than common sense. This can add another hundred million or so of revenue now foregone.

Long-term, though, we must take tax modernization seriously and provide Tennessee with the tax structure required for survival in the 21st century. What would modernization look like? First, cut the sales tax in half and repeal most or all of the grocery food tax -- about 70 percent of Tennesseans would pay less to the state than they do now. Second, initiate a tax on income that would exempt the first $15,000 earned by individuals and $30,000 earned by couples, along with a $2,500 exemption for each dependent. Third repeal the Hall tax on dividends and interest. In addition, this modernized tax structure would produce at least $1 billion more of state revenue than the sales tax-dependent system we have now. All this, with 70 percent paying less than they are paying now!

So there’s the choice. Travel down the road advocated by those proposing to prohibit any version of a tax on income and arrive at sales tax nirvana of 10 to 15 percent. Or take the road of tax modernization that leads to a tax cut for about 70 percent of Tennesseans, plus the revenues to avoid, or at least lessen in severity, today’s crunching budget realities.

Despite their shaky start, we can still hope our elected officials choose tax fairness and common sense rather than a constitutional amendment leading to eventual catastrophe.
Reagan is a professor of American economic, political and military history at Tennessee Technological University in Cookeville.
Copyright (C) 2009 by the Tennessee Editorial Forum. 2/09


loveEliz said...

This makes such good sense that I despair of any legislature ever passing it.