by Joe Sullivan
Every year about this time my hopes rise that the state of Tennessee is at long last going to come to its senses.
As many times as they're been dashed in the past, it takes an eternal optimist to believe the state Legislature is finally going to get the state out of its fiscal bind and onto a progressive course. Yet with budget crunch time upon them, majorities in both the House and Senate appear to recognize the need for a billion-dollar tax increase just to get the state out of the deep hole they've dug for it. Beyond that, widespread lip service is being paid to an additional $136 million funding increase for the area in which the state has fallen furthest behind—namely, higher education—plus upwards of $100 million to cover 2-1/2 percent pay raises for public school teachers and other state employees.
The tax reform plan that has become the focal point of efforts to meet these needs would also go a long way toward rectifying the inequitability of Tennessee's tax structure, which is the most regressive in the land. This plan, sponsored by House Speaker Jimmy Naifeh, would couple a 4-1/2 percent state income tax with the removal of sales taxes on groceries, non-prescription drugs and clothing. The income tax would have a $15,000 exemption for single filers and $30,000 for joint filers. These exemptions, coupled with the sales tax removals, would relieve the undue tax burden presently borne by lower income households who pay a much higher percentage of their income in sales taxes than the well-to-do. The Naifeh plan, which includes some other features, would take effect on Jan. 1. In the meantime, a temporary 1 percent increase (to 7 percent) in the sales tax would tide the state over from July through December.
By most accounts, Naifeh's plan is still a few votes short of a majority in the 99-member House, but if he succeeds in getting them, Senate leaders believe they can muster a majority for it there. If it fails, the only alternative in sight would extend the sales tax to presently untaxed goods and services (exclusive of health care). This plan, sponsored by conservative Republican Rep. Bob McKee of Athens, would raise about $1.2 billion annually, slightly more than Naifeh's. Increases in sin taxes are also in the works, but they would only yield $200 million at the most.
What's most remarkable is that tax reform is within striking distance of success in this election year after failing in the past three years that Gov. Don Sundquist has been recommending it. Election years, of course, are classically the worst time to raise taxes—all the more so at a time when both the Republican and Democrat front-runners for governor are campaigning on a no-new-taxes platform. But legislative leaders of both parties are contemptuous of the posturing on the part of the gubernatorial wannabes to the point of demanding that they state where they would cut spending by a billion dollars or more in order to balance the budget for the fiscal year beginning July 1.
As yet, neither has responded—except for implausible claims by Republican Van Hilleary that he would cut $350 million to $400 million out of TennCare and vague boasts by Democrat Phil Bredesen that he could manage the state's way out of its fiscal crisis.
Both Hilleary and Bredesen point out that a hopefully short-lived recession contributed to the $480 million deficit now projected for the current fiscal year. But however you slice it, that deficit, plus resort to the use of $500 million in non-recurring revenues this year, produces the billion-dollar shortfall that must be covered in the fiscal year ahead. To make matters worse, the state's rainy day fund and other reserve funds that are being depleted to cover this year's deficit will need to be replenished. And even with an economic recovery assumed, only $100 million to $140 million in revenue growth from existing taxes is projected for next year.
As much harm as it's done to the state's fiscal reputation and prospectively its bond rating, the depletion of reserve funds may turn out to be a blessing in disguise where tax reform is concerned. That's because legislators no longer have reserves to tap for smoke-and-mirrors budget balancing; hence, their only resort is to raise taxes or else to make draconian cuts of the sort embodied in what's known as the DOGS (for Downsizing Ongoing Government Services) budget.
If its $782 million in cuts were made, the state would truly be going to the dogs. Everything from schools and local governments to wildlife management would suffer (everything except road building, that is, for which dedicated fuel tax revenues would remain untouched). Two state departments, Tourism and Economic Development, would counterproductively be eliminated.
Because the $1.1 billion budgeted for higher education represents by far the largest chunk of discretionary spending, it would be most vulnerable to the deepest cuts. For this very reason, higher education has already become a stepchild in Tennessee even as most other Southern states have been making it their poster child. Ironically, any further deterioration would come at the very time when UT has gained exemplary leadership for restoring it to the upper ranks of Southern state universities. But incoming President John Shumaker and Provost Loren Crabtree can't be expected to play catch-up with states like Georgia and Mississippi until Tennessee matches the commitment that enabled them to overtake us.
By hindsight, it may be just as well that tax reform efforts have been unavailing up to now. When Naifeh dramatically threw his weight behind them last year, he was backing a 3-1/2 percent income tax that, coupled with sales tax breaks, would have raised about $700 million. That seemed sufficient until the recession took its toll, but now the stakes are higher.
Of course, income tax opponents will seize upon the higher rate to make their point that once an income tax is instituted its rate will inevitably go up. But Naifeh's plan includes provision for a constitutional amendment that would require supermajorities in the Legislature for any subsequent increase in income or sales taxes rates. It would also cap state spending at 6 percent of aggregate personal income, with any overage to be rebated to taxpayers.
Foes of an income tax also like to claim it's unconstitutional because the State Supreme Court so held in 1932. But the U.S. Supreme Court made segregation the law of the land for more than half a century until finally striking it down in 1954, and there is little room for doubt that the State Supreme Court would uphold an income tax now.
So fluid is the situation in the Legislature that my hopes may have been dashed once again even by the time you read this column. But I will cling to them for as long as I can.
May 16, 2002 * Vol. 12, No. 2
© 2002 Metro Pulse
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