Will It Be Back?

Recession usually revives state income-tax talk, and the projections are grim

The last three governors of Tennessee served two terms. All three ran for election and re-election opposed to a state income tax. All three faced a revenue shortfall in their second term and at least considered the option of a state income tax.

Lamar Alexander and Ned McWherter gauged the political viability and dropped it. Only Don Sundquist pursued it to a vote, spoiling his legacy and getting many of the people who supported it beat in the next election.

Gov. Phil Bredesen refused to rule out a state income tax during his first election, saying instead he didn't need it—he had the business expertise to operate state government in the black. It didn't hurt that the Legislature passed a sales-tax increase giving him $1 billion in additional revenue by his second budget year.

Bredesen has stopped the fiscal bleeding with TennCare and diverted some of the money into education. He has built up the rainy day fund. But now and in the coming year we are not going to just have rain on the economy; it will be a deluge. Bredesen recently stopped campaigning for legislative candidates so he could return to Nashville to work on the budget. Shortfall after shortfall. Grim projections for the coming year's revenue.

If the history of past recessions is any guide, we will soon hear that the state's tax structure is flawed, dependent on consumer spending and vulnerable in recession. Not to mention regressive. So will the state income-tax proposal come back?

Two things argue for it. Bredesen evidently has no philosophical problem with a state income tax. He has never made a big deal about being against it. He has just said he could get along without it. Can he still get along without it?

The state is also dangerously close to the psychological barrier of a 10 percent sales tax. The general state sales tax is 7 percent. Add on the various local rates and it goes up to over nine percent.

The best source of new revenue would be repeal of a recently passed tax break. The sales tax on food was reduced to 5.5 percent. As I told legislators at the time, putting the higher rate back on food will be a difficult task. Once you start splitting up the rate among items, you wind up with a sales-tax system like the federal tax code—shot through with exemptions, based on political popularity or the strength of interest groups.

There are reasons to think the state income tax will not come back again—at least not this session. First, I don't think Bredesen wants to end two successful terms as governor the way Sundquist did, limping out of town one step ahead of the tar and feathers. Second, I also think the current crop of legislators is composed of a large contingent of members who got there by beating incumbents who voted for an income tax. Those who voted for it and survived know there is no point in putting their name up on the board supporting it in another losing fight.

Bredesen, for all his success, is not really popular with the legislators. He doesn't have buddies. He has done little to woo them. If McWherter realized he couldn't get it done, even though members loved their former speaker, surely Bredesen knows he could not sway them.

I think Bredesen will submit a budget that will have everyone howling from Mountain City to Memphis. He will propose draconian cuts across the board, maybe even from the already shrinking transportation budget. This will automatically create constituencies demanding increased revenues and possibly a change in the tax structure.

After a lot of screaming and posturing, the session will end with some sort of cobbled-together budget, some tax increases at the margin, deep cuts in spending, and general dissatisfaction. Should the recession drag on and the cuts start to hurt, the session after next may be another story entirely.

By that time the rainy day fund will be exhausted. Gas-tax revenues will continue to decline. If the country is still mired in recession, the pressure will be enormous. And it will be a gubernatorial election year. Shudder.