Ten Years After State Income-Tax Rejection, What Happened to Armageddon?

Since it's the 10th anniversary, someone ought to mark the occasion when almost the entire state political establishment, academia, and virtually all editorial writers were impatiently explaining to us Neanderthals that unless we passed a state income tax, the state was headed for financial collapse.

We were confidently told by University of Tennessee economists that the state tax structure could not support state government. The year was 2002 and the capitol was surrounded by horn honkers, the sidewalks were paved with radio talk-show hosts and remote television trucks. The atmosphere inside was toxic. I was living in downtown Nashville at the time, a couple of blocks from the statehouse.

Arms were being twisted. Money for projects dangled. Everywhere there was gloom and doom. Lobbyists were being enlisted by the leadership to deliver votes.

The income tax bill came to the House floor and was defeated.

Surely Armageddon would ensue.

Tennessee, 10 years on, has a current budget surplus of $600 million. The Legislature this past session eliminated the inheritance tax, the gift tax, and cut the rate of the sales tax on food. This year K-12 was fully funded and funds for higher education were increased. There will be an effort next year to eliminate the Hall income tax for those over 65, and possibly eliminate it altogether.

Name another state during this bad recession that has cut taxes. Around the country, state governments are in crisis. California cities are going bankrupt. Taxes are being raised to cover budget shortfalls.

When Tennessee state government was "starved for revenue" in 2002, the state budget was $20 billion. This coming year the budget is $31 billion.

But there was a sales tax increase in 2002, and at a rate of 9.5 percent in places, it is as high as some major cities. But let's look around. Alabama has a state income tax. The state and local sales tax rate in Birmingham and Montgomery is 10 percent. Around the country you will find combined sales tax rates of from 8.5 percent to 9.5 percent—all of them in states with a state income tax.

That is the argument we made against the income tax. The sales tax would be back and we would have both. We also argued that we were in a recession in 2002 and the TennCare program was being allowed to run wild—it was eating any revenue increases in the state budget.

This recession is worse than the one in 2002. The difference is that state government spending is being kept under control. And TennCare is no longer out of control.

You can argue philosophically that a sales tax is regressive and that an income tax is better for the poor. You can argue it. But a high percentage of our sales tax collections come from tourists and people traveling our extensive interstate highway system. And in states with a state income tax, the people with higher incomes somehow come up with deductions to lessen the tax bite. The poor do not have lobbyists.

With a sales tax everyone pays.

Pensions and employee benefits are often the root of financial problems in states from California to Wisconsin. The Tennessee pension system is in good shape, benefits are not excessive, and employee costs are not a burden on the state budget.

Democratic Gov. Phil Bredesen and a conservative Legislature kept the state's finances on an even keel and Republican Gov. Bill Haslam and an even more conservative Legislature is doing even better—if your idea of better is cutting taxes.

Next year there will be a major push, especially by the hospitals, to expand the TennCare program with the federal funds available under Obamacare. Not expanding the program will mean less revenue for rural hospitals. It will also mean passing up a boatload of federal money.

I don't know how it will turn out, but expanding TennCare may take us back to those thrilling days of yesteryear and the sound of horn honkers will again ring across the land.