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Location: Nashville, Tennessee, United States

5/22/2002

Oh Henry: He's Right!
Jim Henry, the other Republican candidate for governor, recently sat down for a Q&A with The Jackson Sun and while some of what he had to say deserves criticism, Henry absolutely nailed it when he explained some of the reasons the people of Tennessee don't trust their state govermnent.

Some excerpts:

"What is missing in Nashville is a trusted leader. Someone who could tell us something and we trust him... That's been missing for three years and we have suffered for it as a state."

"In order to effectively govern, the next governor has to be truthful with the people during the campaign. You can't lie to them and then change what you say an do."

"There is a great distrust of government in this state. ... But we set ourselves up for distrust. Consider that we use the University of Tennessee to give us our economic forecasting. We shouldn't do that. They have a direct interest in the outcome. How do you get people to trust that? It just gives them another argument against state government.


Henry is right. For years, the state has relied on the rarely-accurate economic predictions of UT economist Bill Fox to guide its budget and revenue decisions. Fox is strongly pro-income tax, and favors large increases in government spending, particularly - no surprise - in the higher education program that pays his salary.

But Fox's economic predictions are laughably inaccurate. Each year he provides the governor with a report on the state's economy. Three times in the 1990s, he predicted a recession or economic slowdown. None happened. Once, he predicted unemployment would rise a percentage point in the coming year, saying the economy simply could not maintain its strong pace. The economy made Fox a fool by accelerating, and inflation fell by nearly a percentage point. The result: tax revenues surged beyond the administration's expectations, creating a revenue surplus. In fact, Fox's near-annual prediction of recession was not reflected by reality until 2001. Hey, even a blind squirrel stumbles across a nut sometimes.

Henry is right - it makes little sense to ask the people of Tennessee to trust an administration that relies on an economist with the obvious conflict of interest of UT's Dr. Bill Fox. With his dismal track record, it makes no sense at all.

But Henry has his own problems. While he is critical of the state relying on UT for its economic projections, he seems to have bought them hook, line and sinker. In another part of his Q&A with The Jackson Sun, Henry claims the state is "losing hundreds of millions of sales tax dollars to catalog and Internet sales."

This is a favorite claim of Dr. Fox, but one that doesn't withstand serious scrutiny.

For one, Fox has claimed that Internet sales are already costing the state $300 million a year in lost sales tax revenue, but simple math shows that would mean the equivalent of the annual sales of about 20 major shopping malls in Tennessee has moved online. Do you believe that? If so, then why are all the malls still open? And why are new malls being built?

Fox made the $300 million claim as a prediction a few years ago, before the dot-com boom went bust and predictions of rocket-like growth for e-commerce were adjusted to more sensible predictions of slower growth. But Fox has not lowered his prediction to reflect that more sober view of the niche future of consumer e-commerce.

Not only that, Fox's data apparenly assumes two things that aren't true, and ignores a basic trend in e-commerce.

Fox assumes every dollar a Tennessean spends online would otherwise have been spent offline, and every dollar would otherwise have been taxable. Not true. First, a significant share of online shopping involves people buying items at auction sites like eBay, often from out-of-state sellers. Without the Internet, most of those purchases wouldn't happen, and those that did would occur at untaxed garage sales. Clearly, purchases on eBay are not costing Tennessee tax revenue. It's also not clear if Fox adjusted his data to exlude online sales by small businesses, which in some cases are tax-exempt offline.

It isn't clear if Fox really understands the trends in e-commerce, either. Most online retailing today, other than auction sites, is done by "multi-channel" traditional retailers. Walmart, for example. JC Penney. Sears. Only a loophole prevents the state from collecting sales taxes on those purchases. The Supreme Court has ruled that the Commerce Clause of the U.S. Constitution forbids states from forcing out-of-state entitites to collect their sales tax if the out-of-state company doesn't have a physical presence in the state. The traditional retailers have created subsidiaries to run their online stores, and if those subsidiaries don't have a physical presence in Tennessee, they are not required to charge you Tennessee's sales tax. A simple change in state law levying the sales tax on the parent corporation would close that loophole.

"Pure-play" online retailers - companies that have no traditional retail outlets - would continue to be able to avoid charging the sales tax, but that's only fair. Think about it. A traditional retailer with physical stores puts a large strain on government services such as roads, public safety, even schools. A web store doesn't. Shop at the mall and you drive there on government roads, while the mall relies on government-funded police and fire protection, and is often a leading hub around which suburban sprawl grows, creating need for more schools and more government services. Shop online and you do so on a computer you paid for, over an Internet connection you pay for, and you put no additional strain on costly government services.

Has Dr. Fox ever studied how much money government saves indirectly because of e-commerce? No. It doesn't fit with his tax-and-spend political agenda. He just continues to recite his $300-million-lost-revenue mantra without offering an intellectually defensible proof of the claim.

Sadly, Jim Henry seems to have bought it.