We Dodged a Bullet
What if Tennessee had adopted an income tax back in 1999, when Gov. Don Sundquist first proposed it? Today, Tennessee wouldn't be facing a minor revenue shortfall but a major fiscal crisis, in all likelihood.

Governors and state budget officers said the fiscal condition of the states was more dire than the condition of the national economy. The recession has reduced state revenues, especially personal income and capital gains taxes, said Raymond C. Scheppach, executive director of the National Governors Association, but the states' fiscal problems are also linked to long-term trends, like the increase in health costs and the growing importance of services in the economy.

The NGA's press release announcing the new November 2002 edition of its biannual Fiscal Survey of States, says states saw a much larger decrease in revenue from income taxes than they did from sales taxes.

In fiscal 2002 sales tax collections were 3.2 percent lower than originally budgeted, personal income tax collections missed states' targets by 12.8 percent...

In other words, if Tennessee had followed the path Gov. Sundquist and others had urged, Tennessee today would be facing a much-larger revenue shortfall. But we were told an income tax would protect us against major shortfalls during a sluggish economy. What happened? Simple: During this sluggish economy, consumer spending is the one sector of the economy that has remained strong.

According to the New York Times, Scheppach also fingers a primary cause of the budget gap in most states: "unaffordable and unsustainable" increases in spending on Medicaid (which, in Tennessee, is called TennCare).

Medicaid and other health costs like employee health benefits account for 30 percent of state spending and grew last year by 13 percent, the largest increase in a decade, the report said. At a time when revenues are declining, Mr. Scheppach said, such growth is unaffordable and unsustainable.

You can see the NGA's November 2002 Fiscal Survey of States here.

It includes some other rather interesting facts:

During a supposed time of fiscal crisis in Tennessee, state government added the equivalent of 1,097 full-time employees to the state payroll, going from 41,703 in fiscal year 2001 to 42,800 now.

The number of full-time equivalent positions in Tennessee state government rose 1.34% from fiscal 2001 to fiscal 2002, and 1.27% from fiscal 2002 to the current fiscal year. Nationally, among all 50 states, the number of full-time equivalent positions on government payrolls rose 0.4% from fiscal 2001 to fiscal 2002, and was reduced by 0.7% from fiscal 2002 to the current fiscal year. Other states trimmed their payrolls to deal with budget gaps; Tennessee's government continue to fatten itself.

26 states used across-the-board budget cuts to eliminate budget gaps in fiscal 2002. Tennessee was not one of them. Tennessee also did not use layoffs, furloughs, early retirement, reorganization of programs, privatization, or fee increases to help close its budget gap that year - measures that other states used one or more of. Could it be that the Sundquist administration was intent on letting the budget crisis fester in hopes of generating support for the income tax?

Tennessee increased general fund spending by 7.6% in fiscal 2002, compared to the year before, the fourth largest percentage increase among all 50 states. Only New Hampshire, Idaho and Hawaii increased spending at a faster rate. 15 states actually reduced spending.

Tennessee budgeted an increase in general fund spending by 4% in the current fiscal year, the 14th largest percentage increase among all 50 states. 17 states actually budgeted less spending.

The national average among all 50 states was 1.3 percent growth in spending in both fiscal years.

The evidence is clear: while revenues falling short of optimistic projections have contributed to the current budget gap, Tennessee spent itself into this position.

At least we didn't make it worse three years ago by adopting an income tax.