Monday, February 23, 2009

Tennessee’s Crisis Prone Tax System


By Thomas F. Dernburg

Currently, most states are suffering revenue shortages that are largely due to the recession. Tennessee is among them. But what sets Tennessee apart is that, even in good times, state and local budgets cannot be balanced without resorting to legislated tax increases and/or spending cuts.

Under normal conditions, population and productivity growth raise the state's income. To maintain current services, public spending must rise at the same rate as the rise in state income. Revenues, therefore, need to grow at that same rate.

Despite this fact that revenues rise automatically as income rises, Tennessee's tax system is such that a 1 percent increase in the state's income yields only an eight-tenth of 1 percent increase in revenue. This means that in every year, regardless of economic conditions, Tennessee governments are confronted by revenue shortages and periodic budget crises.

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