Cutting Spending to the Bone:  Some Alternatives

 

We know that that Tennessee is in the midst of an unprecedented budget crisis.  The current state budget (FY 2010) represents a 10% cut from the prior year.  On top of this, for the coming year (FY 2011), the Governor proposes substantial cuts in TennCare and cuts to other programs averaging about 6%, described in the accompanying article.  At the end of the current fiscal year, the TennCare reserves and Rainy Day fund will be an estimated $850 million.  The Governor proposes to use $202 million in reserves to support designated programs on a non-recurring basis.

 

In this challenging context, the League will work during the 2010 legislative session to maintain as much capacity as possible to meet the basic human needs of vulnerable populations, including children and persons with mental and physical health needs.

 

Recurrent Budget Crises

In solving the budget crisis, raising the sales tax is not an option. Sales taxes were raised in 1971, 1976, 1984, 1992, and 2002 but because of a shrinking tax base (due to exemptions, internet and catalogue sales, and shopping across state borders) revenues have fallen far short of what is needed to provide essential services and have declined as a percent of personal income as well. 

 

Tennessee is too dependent upon sales and other consumption taxes, which make up more than 70% of state revenue.  Lower-income taxpayers pay a greater share of state taxes because a larger portion of their income must be spent on the necessities of life (food, clothing, fuel, transportation) that are taxable.  Meanwhile, higher-income taxpayers have more disposable income to spend on luxury services (maids, limousines, marinas, pool cleaning, pet-grooming, etc)—none of which are subject to Tennessee sales taxes.

 

Of the 50 states, Tennessee is the fourth most biased in favor of higher income people.  Tennesseans earning less than $17,000 per year pay 11.7% of their income in state and local taxes while the middle income group earning between $29,000 and $47,000 pay 9.3%.  Meanwhile the top-earning 1% with annual incomes of $414,000 or more pay only 3.3%. (Who Pays?  A Distributional Analysis of the Tax System in All 50 States.  Institute on Taxation & Economic Policy, 2009. www.itepnet.org. )

 

Alternatives to Cutting Spending to the Bone. 

There are options to raise much-needed revenue and to modernize Tennessee’s antiquated tax structure to ensure that we don’t face this recurring crisis.  The League, a founding member of Tennesseans for Fair Taxation, supported several bills last year that would close existing tax loopholes:

  • Food and Business Tax Fairness Act SB0502, HB1350 would close corporate tax loopholes and reduce sales tax on food.  Closing the loopholes will prevent multi-state corporations from shifting their income to states with low or no business taxes, will put our local businesses on an equal footing with their national chain competitors, and will raise an estimated $120-250 million. 
  • Internet Parity Act SB1741, HB1947 will level the playing field by requiring sites like Amazon to collect Tennessee sales tax if they pay in-state affiliates to solicit business and will raise $32 million.

 

Tax Cut and Job Creation Act SB3236/HB3596. 

The most significant way to correct the tax system is to reduce consumption taxes and add a broad-based income tax to our state’s tax toolbox with a measure like the Tax Cut and Job Creation Act. This proposal would eliminate the state part (5.5%) of the food tax, cut 2% from the sales tax on other items, and reduce the business franchise tax by more than one-half. The revenue would be replaced by a two-tier tax on personal income with generous exemptions of $20,000 for individuals, $30,000 for heads of households, $40,000 for couples and $2,500 deductions for dependents. The tax rate will be 3% on the first $30,000 of taxable income and 6% thereafter.  The bill also reduces the revenue shortfall by $200 million to $400 million.   The League has a long-standing position supporting reduction in sales tax and enactment of a broad based tax on personal income.

 

Almost 70% of Tennessee Households Will Pay Less

Under The Tax cut and Job Creation Act, an individual earning $40,000 would pay about the same; a couple earning $50,000 would save about $150 and a family of four earning  $60,000 would save about $300 per year under the proposed plan. On average, a taxpayer earning $60,000 will break even. Those who earn more will pay a relatively little more tax than at present; those earning less, will pay less. The median income in Tennessee is $43,610. (For additional information about the tax proposals, see www.fairtaxation.org.)

 

Other League Priorities in the 2010 Legislative Session

In addition to addressing budget and revenue issues, the League will be addressing the following issues:

  • Pre-K:  Maintain current funding level for state funded voluntary Pre-Kindergarten programs.
  • Environment:  Restore dedicated funds for land preservation; prohibit mountain top removal; maintain clean water enforcement; and support smart growth legislation.
  • Elections:  Oppose requiring photo IDs and proof of citizenship to vote.
  • Open Government:  Monitor.