Memo to Bredesen: To Spend More, Tax Less
As Tennessee's state legislators prepare to return to Nashville for another season of taxing and spending (that is, after all, what government does), they would do well to read the report, Crisis in State Spending: A Guide for State Legislators, published in the past year by the American Legislative Exchange Council, the nation’s largest bipartisan, individual membership organization of state legislators.

In that report, two highly-accomplished economists explain why higher taxes ultimately harm a state's economic growth, and why reducing taxes (and reducing state spending) leads to higher economic growth.

Here's an excerpt from the report's introduction:

High taxes mean lower economic growth. High tax states grow slower than the low tax states.

U.S. examples abound. From 1964 to 1999, Tennessee grew approximately 20 percent faster than its northern neighbor Kentucky. Tennessee maintained low taxes, and indeed was one of nine states that had a falling tax burden over time. Kentucky’s tax burden, on the other hand, rose sharply.

You cannot find two states more similar than North and South Dakota. The tax burden fell in South Dakota, but rose considerably in its northern neighbor. The result? Economic growth was one fourth higher in South Dakota.

The two poorest states in the Union currently are Mississippi and West Virginia. In Mississippi, the tax burden fell slightly over time, while it rose sharply in West Virginia. Mississippi grew over 50 percent faster than the Mountaineer State, which probably will fall below Mississippi sometime in the next decade if it follows the suicidal fiscal policies of the past.

Colorado, with a falling tax burden, outdistanced neighboring Nebraska, Wyoming and New Mexico with rising taxes. New York’s tax burden increased more than that in neighboring Pennsylvania, New Jersey and Massachusetts, and it grew slower than any of them.

The reports also explores the effectiveness of various tax-and-expenditure limitation laws and constitutional provisions on the books in many states, from Tennessee's very weak spending cap to the very strong Taxpayers Bill of Rights amendment to the Colorado constitution, considered the benchmark.

During the recent Tennessee governor's race, the eventual winner, Democrat Phil Bredesen, criticized the Colorado plan, which losing Republican candidate Van Hilleary had held out as a model for Tennessee to emulate. The Bredesen campaign said such a Taxpayers Bill of Rights would lock Tennessee into staying at or near the bottom in education, etc..., as it would prevent much-needed state spending.

But the ALEC report reveals an interesting statistic - one that the Hilleary campaign should have publicized. (Indeed, the Hilleary campaign in my estimation blew the campaign in part because it was too timid on the Taxpayers Bill of Rights and didn't make it a major campaign issue.)

Colorado's TABOR amendment was passed in 1992. While it has resulted in big tax cuts for the people of Colorado, it has also ushered in an economic boom in that state. Economic booms can produce more revenue for state government, even at lower tax rates.

That appears to have happened in Colorado, which restrained spending via its spending cap but still increased per-capita state spending by 139 percent from 1990 to 2000, the third-largest increase among all 50 states.

Tennessee, which pursued a strategy of increasing taxes and increasing government spending in the 1990s, and routinely exceeded its spending cap, but because higher taxes reduce economic growth, the state actually brought in less revenue than it might have under a lower-tax/higher growth strategy.

Tennessee increased per-capita spending by 76 percent from 1990-2000.

In 1990, Colorado's government spent $2,504 per capita and Tennessee spent $3,753 - 50 percent more per capita than Colorado. By the end of the decade, Tennessee was spending $6,593, and Colorado had increased per-capita spending to $5,992. Tennessee state government now spends just 10 percent more per capita than does the government of Colorado.

Even though Tennessee raised taxes repeatedly during the 1990s in order to spend more, Colorado was able to raise spending faster by taxing less.

If Tennessee's next governor doesn't change direction on tax policy and reduce taxes, Tennessee will always be stuck near the bottom. Mr. Bredesen, the evidence of the past decade could not be clearer: If you want to spend more money, first cut taxes.

(It's also a pretty good way to get re-elected in a landslide.)