The way the General Assembly wrapped up its budget wasn’t as cavalier or irresponsible as it looked. By tinkering with revenue-growth assumptions and plugging in a little one-time money, the lawmakers closed the final gap in an $18.3 billion budget. While the reliance on one-time funds for some recurring expenditures puts the state in a little bit of a hole for the budget that follows this one, that’s probably manageable.
The broader significance is that this year’s settlement puts off dealing with the fundamental problems of Tennessee’s tax structure. In the end, the Senate recognized that the House wouldn’t support altering the tax system and agreed to the let’s-just-go-home budget.
Indeed, it was better for lawmakers to use various artifices to plug the budget gap than to impose the hodgepodge of nuisance taxes that they were considering. At least no additional irrationality was injected into the tax system at a time when there are still reasonable hopes to clean up the whole mess.
Gov. Don Sundquist’s veto, the subsequent override by the House, and the likely override by the Senate on Wednesday all have more to do with staking out positions for next year than with fighting over this year’s fiscal policy. As a real political proposition, Sundquist surely realized that his veto was a futile gesture, given his weak constitutional position. It takes only a simple majority for lawmakers to override the veto. But having made a stand on principle, the governor was in no position to back away, even if the budget wasn’t a total disaster.
Sundquist didn’t exactly cry wolf on the budget. He just overstated how close the wolf truly was to the flock.
Still, it is clear that the Legislature took a good chance to act on tax reform and squandered it. Many of the right conditions were present: a governor committed to the idea, mild budgetary pressures, and the potential for bipartisan leadership. Next year, when the budget looks even tighter, the pressure will be more intense just to find enough revenue to cover more of the same services.
Two basic factors drove this year’s inaction: lack of public acceptance of the concept of tax reform and the unwillingness of many lawmakers to act on their consciences. Now to someone with an eighth-grade understanding of representative government, the unwillingness of lawmakers to vote for something the people were not for may seem praiseworthy. But it is more complicated than that.
Legislators are also meant to bring their best judgment to bear on questions, and they are supposed to have a deeper understanding of the issues than casual emotive observers. As a result, they are supposed to engage in a perpetual balancing act between doing what they know is right and what they know the voters want them to do.
The reason so many of the newsies who cover the General Assembly hold the legislators in such transparent contempt is that they know a solid majority of lawmakers believe an income tax is necessary. But, given their political timidity, those lawmakers sit on their hands, unwilling to do what they know is right.
The General Assembly’s difficulties dealing with the budget this year belie the one key point: Tax policy is not difficult. Basically, there are two questions that need to be answered: First, how much tax money should be collected? And second, how should the process for collection be structured?
To set good and efficient public policy, those questions need to be answered sequentially. Unfortunately, that’s not how the legislative or political processes work, and the final conflagration reflected the inability of the Legislature to untangle the two issues. The final weeks of the session were devoted to looking at various gimmick taxes to fill the gap—even though every gimmick had its obvious inequities.
There is ultimately only one source of revenue for the state: the wealth and incomes of its citizens. Businesses can be taxed, although ultimately those taxes come from the pockets of individuals, either in the form of higher prices for customers or reduced profits for owners. This is not to say that businesses shouldn’t pay taxes, as their specific operations tend to impose costs on society, and somebody’s profit-making venture shouldn’t receive the passive subsidy that ignoring such costs would reflect.
Tennessee’s current tax structure rests upon consumption of goods (i.e., the sales tax), a limited income tax (the Hall tax, restricted to dividends and interest), and business franchise and excise taxes. The concern of tax reform advocates is that as the economy evolves toward an increasing service orientation, neither the business nor the sales tax structures will keep pace with economic activity. Citizens have always felt comfortable with the sales tax because of its transparency. They understand how it’s collected and feel comfortable that it’s not widely evaded. The question in the future is whether the sales tax will become even more regressive. It has always fallen more heavily on those with lower incomes. That disparity is likely to grow.
The Hall income tax remains grotesque. Conceived during the Great Depression at a time when only the very wealthy had significant unearned income, it now bites even people on modest incomes. Most unfairly, it can hit the modest retirement savings of the elderly while ignoring the six-figure incomes of top-tier earners and the capital gains of savvy investors. Moreover, a share of it is returned to the local governments where it is collected. That means a few wealthy enclave communities such as Belle Meade, Brentwood, and the Memphis suburb of Germantown enjoy income-tax windfalls, while other local governments have to scrape by with fewer taxing tools.
Citizens ought to be primarily concerned with how much—rather than how—when it comes to taxation. After all, a dollar is a dollar regardless of which particular rubric the government uses to take it away from you. But citizens don’t want the government to have too many tools for taxation for fear that lawmakers will use them too enthusiastically. That’s why there has always been little support for creating new, broad-based taxes to offset an existing tax, even one that’s obviously unfair. Whether that fear is justified is another matter. As former House Finance Chairman John Bragg used to say, anyone who thinks taxes in Tennessee are high has never lived anywhere else.
Sundquist’s long-forgotten plan represented a slight tax increase—about $300 million—and a major reshaping of how those taxes are collected. His legislation imposed a flat-rate income tax, but reduced the sales tax rate, and eliminated the Hall tax and the sales tax on groceries. The plan—or some descendant version—will no doubt be on the table again next year. What are the chances for passage?
In public-opinion surveys, Sundquist’s approval ratings have plummeted, and he will be a year older and a year closer to the end of his term. A governor’s power always declines as he nears retirement, and Sundquist will be in his final two years.
And most lawmakers will have run campaigns with the income tax as a live issue. In 1998’s elections, few took lock-down positions against the income tax, because no one pressed them, believing it wasn’t a real threat as long as Sundquist was governor. That will not be the case in this year’s elections. When the General Assembly convenes next January, most lawmakers will have run on either no-income-tax or no-tax-increase pledges.
But the next General Assembly will also confront even greater revenue needs. It’s quite possible that budget gimmicks won’t work two years in a row.
As heavyweight champ Joe Louis explained before his title match with the fleet-footed Battlin’ Billy Conn, “he can run, but he can’t hide.” Conn famously outpointed Louis over the first 12 rounds of the 1941 bout at the Polo Grounds. In round 13, Louis finally caught up with Conn and hammered him into the canvas.
The tax question is the irrepressible issue in the Tennessee Legislature. For one more session, lawmakers made a decision to run away from it. Next year, however, may represent the 13th round.
