by Joe Sullivan
The two presumed front-runners for Tennessee's gubernatorial nominations are going around insisting that the state isn't suffering from a revenue shortfall that would warrant a tax increase.
Both Democrat Phil Bredesen and Republican Van Hilleary proclaim that state revenues have been growing faster than the sum of inflation plus population growth. That should be sufficient to meet the state's needs in any longer run, they contend, while dismissing this year's deficit as a recession-induced aberration.
On the growth rates, they are correct. Over the eight years from 1994 to present state tax revenues have grown from $5.46 billion to an estimated $7.52 billion in the current fiscal year. The average annual increase of 4.7 percent slightly exceeds the sum of an average annual increase in the consumer price index of 2.8 percent and the annual population growth rate implicit in a 17 percent increase between the 1990 and 2000 censuses.
Where Bredesen and Hilleary go wrong is in their benchmark for adequate growth rates. They are also mediocrity-minded and myopic in purporting to believe that Tennessee's tax base is adequate to begin with. What they fail to recognize can be categorized as follows:
How far Tennessee lags behind other states
The Southern Regional Education Board compiles a wealth of data comparing the 16 Southern states, and it seems especially fitting to use those data, since Hilleary has said that his top three priorities are education, education, and education. The only hitch is that 1999 is the most recent year for which SREB data are available, which means they don't take into account the severity of Tennessee's fiscal crisis over the past three years. But they are severe enough as is.
The first thing that stands out is that Tennessee ranks dead last among the Southern states in tax revenues as a percent of personal income. At 5.2 percent of personal income in 1999, state tax revenues fell far short of the 5.9 percent SREB average, let alone the national average of 6.4 percent.
The manifestations of that shortfall are starkest in higher education. Alone among the SREB states, faculty salaries in Tennessee actually declined between 1995 and 2000 when adjusted for inflation, compared to a 6.1 percent increase in the SREB average. State appropriations per full-time student declined by 20 percent over the same time span compared to a slight increase in the SREB average.
Despite the boost that public schools (K-12) got from the state's Basic Education Program (BEP) in the early 1990ss, Tennessee still ranks 49th in school funding. Over the past eight years, Knox County Schools have received only a 2.4 percent average annual increase in state funding. That doesn't even cover inflation, let alone contribute toward covering the 469 additional teaching positions (a 15 percent increase) mandated by the state to meet BEP teacher/pupil ratio requirements.
It's true that Tennessee ranks higher in transportation and health care. But does anyone really believe that Bredesen or Hilleary is going to break the stranglehold that the road-building lobby maintains on the state's fuel tax revenues? Where TennCare is concerned, State Comptroller John Morgan has estimated that even its elimination wouldn't save the state more than $150 million. That's because reversion to federally mandated Medicaid, under which only 900,000 of TennCare's 1,450,000 enrollees would be eligible, would spell the doom of the uniquely advantageous federal matching deal that former governor Ned McWherter got for TennCare in 1993.
How Tennessee keeps lagging farther behind
According to the director of UT's Center for Business and Economic Research, Bill Fox, "Tennessee has experienced an extraordinary decline in the relative size of state government. In the 1970s we were at 5.7 percent of personal income. Now we're down to five percent or less. To say that during a recession lots of states are having revenue growth problems misses the point. When there's a recovery, other states will experience very rapid revenue growth, but Tennessee will not come back until we get a tax structure that keeps pace with the growth in the overall economy."
That, of course, means getting away from overdependence on sales tax revenues that fail to do so.
Why watching inflation plus population increases is inadequate
In the private sector, cost increases are held down by another factor: increased productivity. Over the past decade, productivity gains of 1.5 percent to 2 percent a year have been realized due in large part to new technology.
In much of the public sector, however, Fox reckons that new technology is pushing costs up rather than holding them down. "It's meant putting computers in every classroom and then adding people to maintain the computers," he observes. Hence, education costs have been going up well in excess of the inflation rate. The same holds true in health care, where new drugs, devices and procedures have been contributing to double-digit medical inflation, which hits government proportionately harder than any other sector.
Productivity gains in the economy as a whole are also what permit real incomes to rise—as is manifest in a 6.2 percent increase in personal income over the period 1988 to 1999. "If we're not giving real income gains in the public sector as well as in the private sector, then over time the public sector is going to start losing its best people," Fox opines.
If Tennessee is going to avoid falling ever farther behind, its next governor needs to lead the way toward revenue generation that will enable the state to catch up and keep up with the rest of the country. So far, Bredesen and Hilleary seem intent on leading us down the path toward becoming a third-world state instead.
March 14, 2002 * Vol. 12, No. 11
© 2002 Metro Pulse
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