Facts behind state's fiscal crisis appear misinterpreted

By DAVID MOON, Moon Capital Management
November 5, 2000

The state of Tennessee faces a fiscal crisis. Whether the state addresses the crisis or not is not in question ' we will. The only question is how? The solution we choose will have dramatic impact on the every business, taxpayer and individual in this state. These are facts to which almost everyone will agree. After that, however, disagreements begin.

The state's reliance on sales tax is one of the roots of the problem facing the state. Sales taxes do not grow as quickly as individuals' incomes, so as the economy grows, state revenue grows at a slower rate, eventually falling behind the general level of income in the state.

That last paragraph is often-quoted and accepted as fact by many learned, well-meaning people in this state. The paragraph is also wrong.

In eight of the last nine years, Tennessee state sales tax revenues grew faster than did per capita personal income.

From 1990 to 1998, per capita income in Tennessee increased 45.28 percent. Tennessee state sales tax collections increased a total of 86.17 percent. Total state government expenditures increased 91.34 percent ' over twice the rate of growth in per capita income.

If the state government was a person, that person's income increased twice that of the average Tennessean's income.

A 1992 'temporary' one-half percent increase in the sales tax rate became permanent in 1993. It also explains a small part of the large nine-year increase.

If you begin your comparisons at an early enough year, sales tax is inelastic. But the argument from Nashville is that the 'crisis' is recent ' despite the fact that sales tax growth exceeds per capita income growth every year since 1992!

Will the recent trends continue? Who knows? Very smart analysts tell us that sales tax sources will decline, as more transactions find there way to the Internet and avoid the state taxman. That makes sense. But many of the analysts making these forecasts are the same ones who tell us that the state's tax system does not produce enough revenue growth to match our state's growth in personal income. And in the last decade, that simply was not true.

I am not trained as an economist or statistician. (Trained economists and statisticians will quickly make this observation.) But I do work with numbers every day. There may be some way to spin or way to wash the data to support any conclusion you premeditate. But if you look at the data I reviewed, you will see that per capita income in Tennessee consistently grows more slowly than almost any measure of state government activity: sale tax revenues, total tax revenues or total state expenditures.

Of course, there are other dynamics at work here, including a massive increase in state spending on TennCare and the Basic Education Plan. The state's reliance on sales tax raises the ire of progressive tax code proponents. Some people object to sales taxes levied on food products. The state's method of taxing various business forms was under attack a year or two ago. These are philosophical issues that deserve honest debate and consideration. But it is very difficult to have honest debate if we start with proclamations that are in contradiction with the facts.

(All of the income data to which I refer in this column are from US Department of Commerce, Bureau of Economic Analysis. The state revenue and expenditure data are from the State of Tennessee Research Department. The income data are based on a calendar year; the state data are based on a June 30 fiscal year. If you are interested in receiving the raw data, without commentary or analysis, I am happy to provide it.)

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Add me to your commentary distribution list.

MCM website