Overwhelming evidence that the nation's economy has slumped into a recession requires prompt governmental action to address the consequences.
Congress has recognized this by quickly abandoning its "lock box" approach to protecting the federal surplus and turning instead to emergency spending measures in response to the Sept. 11 catastrophe and to the need for additional fiscal stimulus.
The state Legislature also needs to move quickly to address what amounts to a fiscal emergency in the state of Tennessee. In Tennessee's case, emergency spending measures are not the issue. Rather, the issue is how to raise enough revenue to balance the state's budget, as is constitutionally required.
Even prior to Sept. 11, state revenues were falling well short of the level needed for the fiscal year that began July 1. In July, the shortfall was $27.4 million, and it can be expected to mount in the months ahead.
Apprehension and uncertainty grip the land and are pulling the economy down, just as they did when the Gulf War triggered the nation's last recession in 1990-91. Operation Desert Storm put an end to that one in about six months. But we are being cautioned that the nation's newly-declared war on terrorism could take much longer, leaving open-ended possibilities for retaliation of previously unthinkable proportions.
Consumer confidence suffered its biggest monthly decline since the Gulf War, the Conference Board reported on Tuesday. Despite zero-interest-rate financing incentives by Ford and General Motors, automobile sales last weekend fell 16 percent from the average of four weekends prior to the attacks, according to a survey by J.D. Power & Associates.
An even greater chill overhangs the corporate sector of the economy. According to last Friday's Wall Street Journal, "The economic fallout from last week's terrorist attack could extend the current corporate-profits recession into the longest and deepest in 34 years, or perhaps more." That, of course, portends more layoffs and further curtailment of corporate outlays on new plants and equipment, which was already the economy's weakest link.
If the state had been in decent fiscal health, it might be able to withstand these shocks. But, in fact, it was already operating on a budget that was indecently underfunded. After abjectly failing to raise revenue during the most futile legislative session in the state's history, the legislators finally managed to balance the budget by: 1) applying $380 million in non-recurring tobacco settlement funds to cover recurring expenses; 2) cutting out most of the $100 million-plus increase in funding that Gov. Don Sundquist had recommended for the state's most woefully neglected sphere of responsibility: higher education; and 3) directing Commissioner of Finance Warren Neel to make $110 million in additional cuts that the legislators weren't up to making on their own.
The closing of numerous state parks and other curtailments imposed to date are just the first step in what promises to become a much more painful process. Everything from supplements to teacher, police and firefighter salaries to grants for the arts and public television are also on the chopping block—and that's just to cover the $110 million.
Neel has estimated that the Gulf War recession reduced state revenue by about $100 million in fiscal 1991. While no one can say with any degree of certainty how long or deep the current recession will prove to be, the demonic forces that are driving it appear much deeper-seated.
The time for state action to stop the bleeding is now. A special session of the Legislature is needed to enact new sources of revenue in time for them to take effect by calendar year-end. As Sundquist has rightfully said, the state cannot afford to wait until January when the regular legislative session convenes to start addressing the crisis. House speaker Jimmy Naifeh concurs, but legislators are realistic enough to know that a special session would prove fruitless unless a bipartisan coalition can be molded in the Senate.
Just such a tax reform coalition came close to jelling in the waning hours of the last legislative session in July. The tax reform package would have included a 3.5 percent state income tax with a $10,000 exemption, coupled with removal of sales taxes on groceries, clothing and non-prescription drugs. Its enactment would have been subject to a referendum. But negotiations broke down over whether the referendum should be held before or after the income tax took effect and whether a constitutional amendment should be involved.
It's now clear that the income tax needs to be effective first so that the reform package's estimated $700 million annual revenue yield can start covering the projected deficit and hopefully restore higher education funding, reopen state parks, etc. The referendum should be framed in such a way that if the tax reform package fails, the alternative would be an increase in the sales tax sufficient to cover not only this year's deficit but also the $380 million tobacco hole that must be filled in next year's budget. A 1 percent increase in the sales tax would also raise about $700 million, albeit on a much more regressive and less elastic basis.
A pivotal person in all of this is Senate Republican leader Ben Atchley. Atchley has acknowledged the need for a state income tax but adhered to a long-standing pledge not to support one. It was encouraging to read in the News-Sentinel on Monday that Atchley is now saying, "It's probably time to rethink everything... I'm not going to stick my head in the sand... It's become obvious that we have to do something." Yet he still stops short of saying what.
It's up to you, Ben Atchley.