Good thing Tennessee has sales tax

By DAVID MOON, Moon Capital Management, LLC
March 21, 2010

Last week, we learned that Tennessee tax collections in January were $44 million below already lowered recessionary expectations.

The US Census Bureau has complete state tax collection data for the entire country through September 2009. For the four calendar quarters ending last September, Tennessee’s General Sales and Gross Receipts taxes declined 8.73 percent.

Based on purely overall macroeconomic measures, however, it’s a good thing Tennessee doesn’t rely on a state income tax for most of its revenue. The average income tax decline from the 3rd quarter of 2008 to the 3rd quarter of 2009 was a whopping 16.13 percent, or more than twice the 7.91 percent average decline in state sales taxes.

New Hampshire has no state sales tax. Its individual income tax collections fell 26.40 percent. California taxes almost anything that moves, and some things that don’t. Its sales taxes are about 75 percent of its individual income taxes, and those sales taxes declined less than half of its 23.52 percent drop in income taxes.

Interestingly, North Dakota cut all of its individual income tax rate brackets by an average of 12.28 percent on January 1, 2009. Its individual income tax collections actually increased 11.76 percent.

For as long as I can remember, battle lines have been drawn between the pro and anti state income tax folks in Tennessee. The arguments against a state income tax are numerous, ranging from typical anti-Marxist comments to the simplistic (“I don’t wanna pay no more taxes.”) Members of the pro income tax crowd typically fall into one of two camps: the moralists (sales taxes are regressive and unfairly target the poor) and the economists (income taxes are more predictable in poor economic times.)

Those economists have a difficult argument to sustain.

However, there will be plenty of economists who will continue to provide legislators huge reports with four-color graphs littered with ten-dollar words to economically rationalize preferring an income tax to a sales tax.

The moral argument is a different matter. These economic dynamics matter little to the issues surrounding the morality of the tax system argument. There are additional issues to consider such as the value of government services and other transfer payments, but the elasticity of tax revenues is irrelevant with respect to whether a sales tax is fair or not.

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In last week’s column, I questioned the sanity of a housing industry economist who had, apparently, gone on record speculating about the possibility of a coming shortage of housing. The comment I referenced was from National Association of Homebuilders (NAHB) chief economist David Crowe and had been used in two different publications, The Nations’ Building News and Housing Watch. Had I appropriately relied on the original NAHB press release, however, I would have seen that Crowe’s comments were specific to the multifamily housing market, while my data and conclusions last week were about single family homes. My conclusions about a glut of single family homes not yet appearing in the for-sale data were valid. My characterization of Dr. Crowe was not.

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

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