franktalk (2007-51)

Told You So

Frank Talk

State maxed out your credit card and now revenue projections come up short

by Frank Cagle

During the last legislative session, some of us warned you the state government was about to max out your credit card. Debt Collections Solution is just around the corner.

The state funding board, on the advice of state economists, has advised the Bredesen administration that there is a $147 million to a $240 million shortfall in revenue collections for this year. That means the projection for revenues for this year, upon which the budget is based, is flawed. The forecast had been for a ridiculous 5.6 percent growth rate. It will be more like 3 to 4 percent. Holiday spending may turn the trend line around, but there is worry about the national economy and a recession may be in the offing.

Gov. Phil Bredesen came into office with an additional $1 billion per year in new revenue, thanks to a sales-tax increase in the last year of the Sundquist administration and increases in franchise-tax revenue. The recession being over, and revenue pouring in, it was time to repeal the sales tax and keep government spending flat. But instead, the additional revenue has been built into the budget going forward. Once you have committed money to pay raises and funding a new pre-K program, you have cemented the new revenue into state spending.

The state tax structure is based on consumer spending (sales taxes) and strong business growth (corporate taxes). If you have a recession these sources get flat or decline precipitously. Thatâ’s why many people advocate an income tax because they can still come and get the money from your paycheck even if you slow down your sales-tax producing purchases. Sales and corporate taxes are driven by the health of the economy.

It seems a simple thing. Joseph understood it managing the famine in ancient Egypt (Genesis 41). When you have fat years you save for the lean times. But state government invariably decides to use the money from the fat years to take on even more obligations until a downturn causes a major crash.

The Republicans did make an effort to introduce some tax-cut measures. Mostly they argued for a stupid â“take the tax off groceriesâ” plan that was unworkable. Groceries are the most stable source of sales tax revenue and once you start taking the sales tax off groceries you can never put it back. Then you do indeed have a train wreck.

The solution is to cut the rate on all consumer purchases. Then when you have a downturn in revenue, you have some cushion to raise the rate. The Democrats understand this and refused to go along with the grocery sales-tax planâ"which was fiscally prudent. They were also correct to say the Republicans were doing it as a grandstand play and were not serious about tax reform.

But the Democrats made no effort to cut taxes. They not only spent what Bredesen proposed, they also put up an additional $20 million in a slush fund for spending in each legislative district.

Bredesen has salted away revenue in the rainy-day fund. It is more than governors traditionally put away, but it still isnâ’t enough. But if the last three years of his administration are caught up in a recession, he will probably be able to cover deficits until he limps out of office.

Then we can have another gubernatorial election in the middle of a fiscal crisis. We will hear the stateâ’s tax system has a structural flaw and we need to have an income tax. There will be wailing, gnashing of teeth, and bitter arguments.

But the state sales-tax rate (including local levies) is dangerously close to the psychological barrier of 10 percent.

When the debate starts on tax reform and all of you good government goo-goos start crying about the regressive tax structure, I just have one question for you.

Where were you last session when you had an opportunity, in a time of plenty, to argue for a reduction in the regressive sales-tax rate? Not only did Bredesen and the legislature not reduce the regressive sales tax, they also levied a huge regressive increase in the price of cigarettes, the vast majority of which are purchased by low- to middle-income people.

Frank Cagle is a political analyst . You can reach him at frank@frankcagle.com .

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All content © 2007 Metropulse .

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