Cutting Taxes in South Carolina To read the full report on South Carolina Republican candidate for governor Mark Sanford's plan to abolish the state's income tax, click here: Plan to abolish state income tax earns applause from 53 economists.

Spending spawns states' fiscal crises To read the full report from the American Legislative Exchange Council, click here: Crisis in State Spending: A guide for state legislators. The report is in PDF format.

The Coming Economic Boom - Business 2.0 offers a long and very worthwhile essay comparing the information revolution with past technological revolutions such as the Industrial Revolution, the railway revolution, the steel and electricity revolution and the great era of mass-production. Noting that "all threads of thought on technology revolutions lead back to Austrian economist Joseph Schumpeter, a single figure writing in the first half of the 20th century" who often is cited by business gurus for his idea of innovation bringing "gales of creative destruction," the essayist details the emergence, growth and end of each of these technology and business revolutions and finds that in every case, it wasn't the revolution itself but the "build-out" that powered great economic progress. "The information revolution is not radically different from previous revolutions. The Internet has had its boom and crash, and there is no reason to suppose that history will be negated: Full use of the technology will arrive eventually. It always has."

What We're Up Against - The Denver City Council has passed a resolution discouraging the city's police from following the USA Patriot Act, which Congress enacted after Sept. 11. Denver Mayor Wellington Webb promises to put the resolution, which discourages the police from investigating groups or individuals based on their country of origin or immigration status, into police policy. But, reports the Wall Street Journal, that is exactly the kind of investigating that helped police in the Denver suburb of Broomfield to arrest two potential terrorists who were making false IDs for other Pakistanis, were engaged in a series of questionable international financial transactions, and, ominously, one of whom had just gotten his pilot's license. The Denver City Council resolution would've stopped the Broomfield police from asking the kinds of questions that lead to the men being arrested.

In the War on Terrorism, we're not only up against Islamo-fascist terrorists. We're up against idiots like the Denver City Council.

Tax Reform Russian-style - The old "Evil Empire" now has the most economically advantageous and fair income tax among industrialized countries. Check out this National Review article on the salutary effects of the 13 percent flat tax instituted not long ago in Russia as President Vladimir Putin instituted true tax reform. The flat tax took effect in January 2001, and Russia's economy grew by more than 5 percent last year while most other nations were mired in recession. And Russian tax revenues are skyrocketing even though the tax rate now is now far below the 30 percent top rate of the old system. Preliminary government data shows -adjusted tax revenues climbed 28 last year, proving that the "class-warfare artists in Washington" are completely wrong when the demagogue against tax cuts. The Russian experience proves, again, that a low, flat tax creates rising revenues. And Russia's flat tax is less detrimental to savings and investment, the story explains, because unlike here in the US, where income is taxed both when you earn it and when you invest it, Russia does not double-tax corporate income or impose a capital-gains tax on stocks, bonds, and home sales.

Priceless - Most of the time, my focus here is on Tennessee politics and taxes, but sometimes other things catch my eye. One of those things is Victor Davis Hanson's weekly essays in National Review Online are must-reading for anyone who wants to truly understand the war on terrorism and we must and will fight it - and win it. His recent essay, Questions, is a series of rhetorical questions, each more devastating than the last. Two examples:

If nearly two-thirds of the Arabic world believe that Arabs were not involved in September 11, why should any American believe anything that two out of three people from that region say?

Has anyone heard a Muslim in the United States condemn September 11 without employing the word "but?"

The Colorado Lesson - Colorado has an income tax, yet Colorado also has a big budget shortfall thanks to the recession, proving that not even an income tax can assure a state will avoid fiscal crises. But that's not the most important lesson of Colorado's budget crunch. The truth is Colorado's $1 billion shortfall would have been far worse if the state hadn't finally placed a firm limit on the growth of taxing and spending a few years ago, in the form of an amendment to the state constitution called the Taxpayers Bill of Rights that limits spending increases to inflation+population, and prevents tax increases without the state getting approval from the people in a referendum.

Needless to say, TABOR is wildly popular in Colorado. Needless to say, big-spending politicians don't like it - even though TABOR has permitted government to grow 5 and 6 percent a year.

TABOR has had a stabilizing effect on Colorado's finances, according to an extensive research report by Dr. Barry Poulson, an economist at the University of Colorado in Boulder. The report, Learning to Live Within Colorado's Tax & Spending Limits, was published by the Independence Institute, a non-partisan think tank in Golden, Colo.

TABOR offers a clear and sensible guide to smoothing out Tennessee's fiscal roller coaster ride.

The Socialist and the Income Tax - Some outrageously accuse Gov. Don Sundquist of being some sort of proto-socialist with unquenchable desire to tax incomes and enlarge government. Not me. In fact, I believe Tennessee would be well-served if Sundquist was in some ways more like that leading European socialist Lionel Jospin, prime minister of France, especially when it comes to taxes.

Jospin wants to be President of France, again. He was president before losing the job to Jacques Chirac in 1995. Chirac is a "Gaullist" while Jospin is the leader of France's Socialist Party. Socialists tend to like income taxes – especially big-fat "progressive" taxes that slap higher tax rates on people if they get a bit too economically uppity for the ruling elite's tastes. Under such a tax code - similar to the one favored by Gov. Sundquist - the more you make, the more socialists take and give to someone else.

Which makes it all the more strange and sublimely ironic that at a time Tennessee is saddled with an allegedly conservative governor who wishes to drill a $1.2 billion hole in the collective wallet of every Tennessean, big-time socialist Jospin is promising the people of France a tax cut. An income tax cut.

That's right. In his 40-page campaign manifesto, entitled "I commit myself," Jospin promised a number of things to help accelerate France's moribund economy and reduce its chronically high unemployment. A biggie: cutting the income tax by 10 percent and slashing France's housing tax in half. Jospin says his plan will help the French economy and lead to a balanced national budget. Jospin's plan is meant to counter Chirac's own promise that he'll cut income taxes by a third over the next five years.

Of course, Jospin is a politician so perhaps he is being Sundquistian. Tennesseans know too well that some candidates' "commitments" on taxes are subject to post-election review. But let's not be cynical – perhaps Jospin really means it when he endorses tax cuts. If so, then over there across the Atlantic a big-government socialist is endorsing lower taxes to grow the economy, while over here our "Republican" governor is endorsing higher taxes to grow the government at the expense of people still suffering the after-effects of a recession. Maybe over there Jospin has realized that "It's the economy, stupid," while over here, our leader offers merely a surplus of stupid economics.

The spin franchise
Neel does the data-spin flim flam again
The latest revenue figures from the state show growth in revenue from 19 of the state's 23 different taxes, including the supposedly "obsolete" sales tax that provides over half of state revenue. State Finance Commissioner Warren Neel's announcement of that latest revenue numbers highlighted how most of our taxes are showing year-over-year growth.

Well, okay, I just made up that second part - the truth is that instead of talking about all the taxes that generated growing revenues, Neel highlighted one that didn't. He focused his gloomy report on the franchise and excise tax, of which collections actually dropped in February compared to February a year ago.

What Neel doesn't tell you is that F&E taxes are paid quarterly and must be paid by the 15th day of the fourth month after the end of a company's fiscal year. And according to the Tennessee Department of State, most Tennessee businesses use the calendar year as their fiscal year. That means very few businesses actually owe the tax to the state until April 15. At the tail end of a recession, it's not surprising that business owners aren't rushing to send checks to the state two months before they are due.

Incidentally, this isn't the first time Gov. Don Sundquist's finance commissioner and duly appointed income tax cheerleader has mis-construed F&E data to support the administration's claim of a revenue crisis.

A year ago this April, Neel announced the monthly revenue totals by highlighting a $98 million decline in franchise tax revenues. April reports detail revenue collected in March. But Neel failed to include the important caveat that recent changes in the tax law mean most Tennessee companies don't have to pay the tax until mid-April.

What happened a month later in mid-May 2001 when Neel reported April collections, was entirely predictable. In fact, while other media unquestioningly swallowed Neel's spin, I did predict it. In an April 13 press release re-published at Chattanoogan.com, I said that "franchise tax revenues likely will rebound strongly in April as Tennessee businesses meet the April 15 deadline - but that revenue won’t be tallied and reported to the General Assembly and the general public until mid-May."

And indeed franchise and excise tax collections soared to $293.8 million in April, $93 million more than the budgeted estimate for that tax for that month, erasing the previous month's F&E 'deficit' and boosting overall revenues to a $69.5 million surplus over the "budgeted estimate" for revenues that month.

Neel's response to that soaring revenue a year ago reminds me of how in the last few months he has either highlighted or excluded sales tax revenue from vehicle sales depending on how it supported or undercut the administration's income tax agenda.

In April 2001, Neel stressed declining F&E revenue as a reason the state needed to pass an income tax. A month later, F&E revenue soared, so Neel tailored the data in his May 16 press release to claim a rather large deficit "excluding franchise and excise tax collections."

I uncovered and wrote about that particular flim-flam data spin while working as a policy analyst for the Tennessee Institute for Public Policy, and issued a press release that was republished as a commentary by Chattanoogan.com.

Here's a couple of quotes from that press release: "Today's revenue numbers were entirely predictable. Just as sure as, well, death and taxes, collections of franchise and excise tax soared in April. Last month Finance and Administration knew changes in the tax law would mean lower collections in March and higher collections in April, yet in chose to portray the revenue decline as a serious problem that was adding to the deficit."

"Excluding the franchise and excise tax is nonsensical - F&E taxes are the second-largest source of Tennessee's tax revenue after sales taxes. It's like saying if you exclude Mondays the work week is only four days long. It's got little to do with reality."

A year later, things haven't changed. And so, I'll repeat what I said almost a year ago.

"It's time for the Department of Finance and Administration to stop playing games. Good public policy can not be build on a foundation of bad information."

In fact, it is way past time.

Rethinking TDOT
My column in Thursday's Nashville City Paper explains how the state is failing to take advantage of a funding mechanism that could allow Tennessee to accelerate its road-building program. Essentially, Uncle Sam will now let states issue bonds for highway projects and pay off those bonds, including interest, with future federal highway dollars. Using the federal "GARVEE bonds," new roads get built sooner, before inflation drives up the cost of labor, materials and right-of-way; the state gets the economic benefit of the roads sooner, and taxes don't have to be raised. In fact, if the state were to augment its "pay-as-you-go" policy with $100 million worth of GARVEE bond-financed projects per year, it would free up more than enough money to allow the state to shift the Department of Safety under the TDOT budget - allowing the state to re-direct general fund dollars currently used for the Department of Safety to some other use, such as deficit reduction or education reform. See below for more resources and information on GARVEE bonds.

Smoke signals
Recommended reading today: Seeing through the Smoke, an essay by Bruce Bartlett that examines "serious questions about the conflicting goals" of the tobacco settlement in light of a report from the Council of State Governments that falling cigarette consumption will cause state revenues from the settlement to come in 20 percent lower than expected. The CSG says states will get $14 billion less from Big Tobacco than originally projected through 2010.

"Predictably, the states are whining about the lost revenue, saying it will increase pressure to cut spending. This only goes to prove once again that the settlement was never really about reducing smoking. It was always about one thing: extorting money from the tobacco industry. Were it otherwise, the states would be jumping for joy at the great success of higher prices on reducing cigarette use. That is what they always said was their goal."

GARVEEs a route to sensible TDOT budget
(Note: The information below is intended as support material for a column published in the March 14 issue of Nashville City Paper, and we recommend you read that column first.)

A long article on recent developments in federal project finance, published two years ago by the Turner Fairbank Highway Research Center, is as good a guide to GARVEE bond financing as you'll find anywhere. The article is written by Dave Seltzer, a a former senior adviser to the federal highway administrator on project finance finance, and who also worked as an investment banker in public finance and has served as a lecturer at the Fels Center of Government at the University of Pennsylvania.

GARVEE bonds (it stands for "Grant Anticipation Revenue Vehicles") were created by the National Highway System Designation Act of 1995, which, for the first time, expressly authorized states to apply federal-aid to reimburse principal, interest, and other financing costs incurred in connection with debt-financed highway projects. Seltzer explains that prior to that act, virtually all federal highway funding reimbursed states on a "pay-as-you-go" basis for the federal share, generally 80 percent, of construction costs.

"It is a widely accepted principle of public finance to fund long-lived assets with debt repaid over a similar term... This approach - called 'pay-as-you-use,' as opposed to 'pay-as-you-go' - is more equitable because it shares the costs in the form of debt service payments among both current and future beneficiaries/users," Seltzer says. While interest payments on bonds can double or even triple the total dollars paid out, Seltzer says, "the true cost in financial terms is really no greater because future years' dollars are worth less than today's (and) the state gains from accelerated project completion by avoiding cost inflation and by realizing the project's benefits sooner."

FYI: The Turner Fairbank Research Center is an agency of the U.S. Department of Transportation's Federal Highway Administration.

GARVEE vs. Pay-as-you-go - The Federal Highway Administration offers a primer on financing road projects using GARVEEs to finance bonds. FHA also offers a helpful comparison of the advantages and disadvantages of both pay-as-you-go financing and bond financing for major road projects. While pay-as-you-go financing avoid interest costs, is simple, and keeps a state's debt ratio down, the disadvantages include large projects typically are built in multi-year segments so current users are burdened with both the entire project cost and long years of orange construction cones and traffic delays, while project delays may result in cost over-runs and cost inflation. The advantages of bond financing include earlier project completion, no inflation delays, quicker economic development impact, higher user satisfaction and spreading the cost of the project over its useful life.

InnovativeFinance.org - InnovativeFinance.org is an information clearinghouse about innovations in all areas of surface transportation finance. The site, sponsored by the National Cooperative Highway Research Program, is funded by research monies from the U.S. Government. The web site has a trove of information on traditional and cutting-edge tools for financing new roads and other transportation infrastructure such as GARVEEs, TIFIA, and SIBs.

Paving the Way: A review of the Texas Department of Transportation - I especially recommend Chapter 2, Section 1, which explores in great detail how a state can use innovative financing techniques such as GARVEEs to leverage federal dollars to pay off bonds, enabling the state to accelerate needed road projects without resorting to higher taxes that a pay-as-you-go system would require.

Two advantages of GARVEE bonds over regular bonds:
1. GARVEE bond financing does not require a bond referendum. 2. GARVEE bonds have their own sources of repayment and therefore do not count toward a state’s statutory debt limit.

Texas' comptroller calculates that GARVEEs would accelerate projects, easing congestion sooner and improving the ability of businesses to transport goods and services, and thus "have a positive and profound immediate economic impact on the Texas economy." In fact, the comptroller estimates that by issuing $1.1 billion in GARVEEs to immediately construct projects that, under a pay-as-you-go system would otherwise take 15 years to complete, "these projects would economically benefit the state some $1.7 billion more, over 30 years, than if they were delayed by the present pay-as-you-go system." Amazingly, the positive economic benefit "even takes into account debt service payments."