During the state income tax wars of the 1990s and its climactic defeat in 2002, Tennessee legislators and conservatives were lambasted for being economic morons who could not understand that the state faced financial disaster without tax reform. But we stayed the course, the economy improved, and a sales tax increase left us in pretty good financial shape going forward.
It is interesting that we are again faced with an economic downturn but there has been no move to raise the state income tax issue again. Part of the reason is that many longtime legislators who were convinced to vote for a state income tax were systematically removed from office. The state Legislature is even more conservative and anti-tax than it was in 2002.
Gov. Don Sundquist had let TennCare spending get out of control; it was eating a disproportionate share of the state budget by 2002. The state went into a recession in a weak financial position. Gov. Phil Bredesen got TennCare spending under control, built up the rainy day fund, and we entered this recession in better financial shape. Revenues have been creeping up the last two reporting periods and the worst-case scenarios for budget shortfalls may be avoided.
Tennessee has less debt than almost any other state. The pension fund for state employees is in good shape. Meanwhile, it is now being suggested that some states like California and Illinois may have to be allowed to go bankrupt in order to deal with union contracts and pension obligations.
Investors are selling off state and local municipal bonds, once considered the safest place to park your savings—indeed, buying munis was considered the choice of the timid people who were averse to the risks of the stock market.
Census figures reveal that there is a continued exodus of people from high-tax states like California to places like Texas and Tennessee—two states known for not having a state income tax. It seems odd that the American people seem enraged by taxes these days—federal income tax rates are certainly as low as they have been in modern times. But I don't think we are taking into account what has been happening at the local and state level. There are states where you not only pay a state income tax, but you also pay a county income tax and even a city income tax. And sales taxes and property taxes are also high.
One wonders how anyone not making a six-figure income can even live in these places.
Is it any wonder that families have been voting with their feet—or at least with a U-Haul trailer?
We will no doubt face some challenges with the next state budget. Indeed, Gov.-elect Bill Haslam made his ability to handle the budget the centerpiece of his campaign. But considering the financial state of the states, Tennessee has a lot for which to be thankful. Non-union state employees have not had a raise for three years—but they haven't faced mass layoffs as in some states. They also know that even though they don't have the lavish pension plans of places like California, they do have a pension that is stable and will be there. It may very well be that the budget shortfall next year can be dealt with by a hiring freeze and attrition—there are a lot of state employees well beyond retirement age.
There are so many states that have state employees with outsized paychecks and lavish pensions that Congress is being asked to bail them out. It seems unlikely that the Tea Party-backed Republican candidates who took over the House this last election will be sympathetic. And they shouldn't be.
California and Illinois are indeed the General Motors among the states. But rather than a government bailout, they need to go into bankruptcy and rid themselves of union contracts and pension obligations—or negotiate them down. It should not be left to fiscally responsible states like Tennessee or Texas to take money from its taxpayers to bail out the profligate spending of Gray Davis and Arnold Schwarzenegger.