Commentary

Tennessee Should Be Cutting Taxes, Not Raising Them

By Stephen Moore
This article appeared in the Commercial Appeal, November 14, 1999.
All over America, governors from George W. Bush of Texas to John Engler of Michigan to George Pataki of New York have been aggressively cutting state taxes. Almost two-thirds of the states have enacted record income and business tax reductions since 1995, to make themselves more economically alluring to businesses and families.

One state has conspicuously swum against this national tax cutting tide: Tennessee. While almost all of the nation’s other governors are tightening their belts and chopping anti-growth income and corporate income tax rates, Gov. Don Sundquist stands nearly alone in his proposal to raise several hundred million dollars of new taxes.

Get with the program, governor. You should be cutting taxes like dozens of your fellow Republican governors, not raising them.

Based on the experiences of other states, I will make two predictions about the impact of Sundquist’s proposal for a state personal income tax, should he succeed.

First, a personal income tax in Tennessee would almost certainly reduce economic growth and job creation in the state. This effect would be particularly pronounced, given that other states are cutting taxes at the same time Tennessee would be raising them.

In the 1990s, the states without an income tax have created jobs at roughly twice the rate of the high income tax states. Tennessee shouldn’t be chasing the losers. The fact that Tennessee has no income tax is one of the state’s greatest comparative advantages over other states.

Let’s compare Tennessee and Kentucky. These two states are similar in almost every respect, except that Kentucky has an income tax and Tennessee doesn’t.

Between 1980 and 1998, Tennessee’s per capita economic growth rate increased by 47 percent, versus 36 percent in Kentucky. It takes a Kentucky resident 13 months of work to earn what a Tennessee resident earns in 12 months. The second impact of a state income tax would be to trigger much faster growth in state expenditures. This has been the experience of other states after they enacted an income tax.

Income tax advocates argue that the state’s tax system is not producing enough revenues. Wrong. In the 1990s, even without an income tax, Tennessee’s per capita tax receipts have grown 12th fastest among the states. The state is anything but starved for tax dollars. In fact, if tax collections had grown only at the pace of population increase plus inflation (as is required by law in many states), the average Tennessee family of four would have paid $ 1,000 less in state taxes this year.

So why is there a big budget shortfall? Runaway spending. In the 1990s the state budget has grown by roughly 75 percent in nominal terms and by about 45 percent in real terms.

Sundquist insists that opponents of his tax scheme - the Neanderthals, as he calls us - must come up with our own plan to balance the state budget. Here are some policies of other states that could stop the red ink:

  • Prohibit state expenditures from growing faster than personal income in Tennessee. The 30 states with reasonable tax and expenditure limitations have done a far better job of restraining state government growth than Tennessee has.
  • TennCare is bankrupting the state, with stampeding costs and the most inflated enrollment of any Medicaid program in the nation. Tennessee should return to conventional Medicaid coverage, and pay only for essential medical services. If TennCare cannot be dismantled for political reasons, the only way to restrain costs is to cap overall expenditures and place a ceiling on overall enrollment.
  • Cut corporate subsidies. The State of Tennessee spends nearly $ 1.5 billion a year on “economic development.” A lot of this money goes to provide special spending projects for businesses. Tennessee businesses shouldn’t be living on the dole.
  • Use the tobacco litigation settlement money for closing the budget shortfall. Tennessee is scheduled to receive hundreds of millions of dollars over each of the next 25 years in lawsuit funds from tobacco companies. This windfall should provide ample revenue to help balance the budget without new taxes.
  • Most important, let the voters decide. Tennessee’s taxpayers should have a veto power over new tax hikes. Eight states require voter approval of new taxes. This is needed in Tennessee.

Despite Sundquist’s claims that his administration has been fiscally tightfisted, the budget crisis in Tennessee is the result of steady and ultimately unsustainable budget increases over the past decade. It makes no sense to give the big spenders an even bigger allowance through an income tax.

If the governor will not discipline spending in Nashville, the solution for Tennessee is not to get a new income tax, but rather to get a new governor.

Stephen Moore is director of fiscal policy studies at the Cato Institute. He specializes in state budgeting practices.