Analysis of the Tennessee Budget Fiscal 2002-2003
by Phil Valentine

Table of Contents

About The Author

Introduction

Sales Tax vs. Income Tax

 ·         The Elastic Income Tax Myth

Another Year, Same Tactics

• It’s For The Children
• Reading Is Fundamental
• Improvements – Budgetese for Spending Increases

 When Is A Cut Not A Cut?

 Summary

Reference Notes

 Copyright © 2002 by The Phil Valentine Show - Nashville, Tennessee
  Any portion of this document may be reprinted provided proper credit is cited.

About The Author

WLAC Radio talk show host Phil Valentine is the only journalist or media personality who, each year, goes through the state budget in an effort to find ways to save the taxpayers of Tennessee money.  His recommendations have been handed out on the floor of the General Assembly and he was called to make a presentation to the Senate Finance Committee on his findings. 

In the summer of 2000, he helped lead a movement to kill a proposed state income tax which income tax supporters attempted to sneak in on a Saturday.  After getting word of the special session late the day before, Valentine set his show up in front of the Capitol at noon on Saturday.  Encouraging citizens to come down and honk their horns in opposition to the tax, the Capitol was besieged by angry motorists and pedestrian protesters.  The measure was postponed several times that day and, weeks later, eventually killed. 

After repeated attempts to pass the income tax, the general assembly tried once again to sneak it through in the summer of 2001.  Phil was alerted by State Senator Marsha Blackburn and, in turn, alerted his listeners.  Thousands descended upon the state capitol in what was described by pro-taxers as a mob or riot.  In reality, only minor damage was done by some overzealous protestors but the event demonstrated to the general assembly members that the people of Tennessee adamant in their opposition to a state income tax.  Subsequently, the income tax plan was abandoned.

 

Introduction

The income tax issue has been debated for decades in Tennessee.  Several governors have proposed the tax in varying degrees but the general assembly has always dodged the issue.  Since Governor Sundquist’s re-election in 1998, he has become a staunch supporter of the income tax after promising the citizens of Tennessee that he would never support one.  In fact, in 1994 he made that pledge number one on his campaign platform.  After reaching the safety of his second term and under the constraints of term limits he found it safe to come out in support of the tax he so vilified during his campaigns.

During the Sundquist Administration, tax receipts have been at record highs due to a booming economy, despite claims that the sales tax is not elastic enough.  Instead of being good stewards of the taxpayers’ money and holding growth to the rate of inflation and population growth, the administration and the general assembly embarked on record high spending and projects the state simply could not afford.  When the inevitable economic downturn occurred, the state was overextended.  With desires for new spending outstripping tax revenue, the governor reached his self-fulfilling prophecy – a budget crisis. 

If this governor and his complicit general assembly had put the taxpayers’ interests first they would have taken a cue from Colorado.  Colorado’s budget, by law, cannot exceed the rate of growth in population and inflation.  We have a similar law but it only requires a simple majority to make an exception for it, which has been done numerous times over the past two decades.  In Colorado, if tax revenue exceeds the budget, the taxpayers are either given a rebate or are asked to vote on how to spend the money.  The taxpayers also retain the right to vote on any increase in taxes.[1]  That is true tax reform. 

It may come as a shock to a lot of people to learn that not only does Tennessee not ask the taxpayers what to do with excess revenue, the governor doesn’t even ask the general assembly.  It’s called ‘sum sufficient.’  That’s when the finance commissioner takes excess tax dollars and awards them to different departments as he sees sum sufficient to run that department.  No appropriation by the general assembly.  No vote by the taxpayers.  The governor and his people refer to this money as ‘unbudgeted dollars’ and spend these dollars as they please.  This is clearly against the law and has contributed greatly to our budget woes.

After being turned back from the income tax by angry citizens, the pro-income taxers rammed through a budget last year that spent hundreds of millions of dollars in one-time tobacco money.  This was designed to push us closer to the budget crisis precipice.  Once there, the pro-income taxers were certain that an income tax would appear preferable to falling over the ledge.  They have now managed to take control of the argument to where options have been whittled down to various plans for tax increases.  In the following analysis, you will learn just how they managed to get us to this point and why, now more than ever, we must hold our ground and not accept a state income tax.

 

Sales Tax Vs. Income Tax

 The Elastic Income Tax Myth

This economic downturn of 2001-2002 (it technically was not a recession) gave us an excellent opportunity to test an old belief that the income tax is more elastic than the sales tax.  I used to believe this myself until I started really digging for the facts.  In the April 2002 issue of State Legislatures magazine, published by the National Conference of State Legislatures, they compared all 50 states and came up with this conclusion: “The states suffering most are generally those that rely the heaviest on income taxes.”[2]  If you think about it, it makes sense.  In a bad economy people cut back on their spending and that reduces the sales tax revenue to a certain point.  However, in a bad economy, some people also lose their jobs.  No income means no income tax.  As the article in State Legislatures magazine confirms, those states that put their eggs in the income tax basket get burned worse than those that don’t. 

 

There’s another reason we’re better off with the sales tax.  The federal government already taxes income.  Our way of taxing is more of a compliment to the federal way instead of heaping on another burden.  Also, cost estimates run anywhere from $300,000 to a half million dollars per year just to collect the income tax.  A sales tax is also fair because everyone pays the same rate.  The added bonus to a sales tax is you have more power over how much you contribute.  If you purchase a lot, you contribute a lot.  If you choose to save, you contribute less.

 

The sales tax also catches illegal dollars.  Drug dealers and prostitutes who normally skirt the income tax cannot escape the sales tax.  If they buy something, they pay.  Everyone contributes.  All the more reason not to take the tax off groceries.  That’s the only way some citizens contribute to the upkeep of the state and everyone who’s able should contribute.  I hear all the whining about low-income citizens who have to pay tax on food.  First of all, those really in need not only don’t pay taxes on food, they don’t pay for food, period.  Those most needy among us are on food stamps.  There are also plenty of ways to recoup what you pay in sales tax on groceries.  Clipping coupons is one way.  Another is to use your VIC card from Harris Teeter or your Kroger Plus card.  If you shop wisely, you can more than make up the difference in savings.  Secondly, our poverty rate is around 13 percent yet we spend a third of our budget on health and social services primarily for the poor.  We do a very good job in this state of taking care of the poor, not to mention the countless charitable organizations that help those who can’t help themselves. 

 

Instead of concentrating on removing the tax from groceries, our elected officials should look into closing the sales tax loophole.  We should start taxing things like newspapers, industrial machinery, farm equipment, railroad rolling stock and other such items that should fall under the sales tax but are presently exempt.  I’ve run the numbers.  Just closing those few exemptions would pull in more than $400 million annually.  Before the governor starts salivating over that loot, let me add that I would, simultaneously, lower the state portion of the sales tax to make it a zero sum gain.  Depending on how many exemptions you close, we could reduce our state portion of the sales tax from 6 percent to as low as 4 percent.  This way everyone shares an equal but lower tax burden.

 

Beware of Rich Income Tax Supporters

 

Some of the wealthiest Tennesseans have come out publicly in favor of the state income tax.  Pro-income tax groups and liberal newspapers have lauded them for their altruism.  Before you go giving these people medals you need to understand their motivation.  Every single income tax proposal that’s come down the pike has had one thing in common.  Every single one abolishes the Hall Tax.  You may not know what the Hall Tax is.  It’s a tax on interest and dividends from stocks and bonds.  The rate is 6 percent, a hefty price tag, even for the boys down at the yacht club.  Imagine if Reginald Rich makes two million on his investments, the state of Tennessee is going to take $120,000.  Egads!  That could buy a new Jaguar or a membership at the country club.  These pro-income tax fat cats want to shift the burden to the middle class.

 

Now, I’m not for soaking the rich, by any means.  This tax is paid by anyone at any income level with any investments.  But if it comes down to choosing between taxing a guy who’s sitting back and watching his money grow or taxing the guy on the income he earned from the sweat of his brow, I’ll choose the former.  These wealthy proponents of the income tax, whose income is derived primarily from their investments, stand to make a killing by shifting that burden onto the backs of the working men and women of Tennessee. 

Another Year, Same Tactics

It’s For The Children

This latest budget from the governor is dripping with more shameless exploitation of our state’s children.  In the cover letter to the 102^nd General Assembly, the governor states that this budget “tells us how to help the children of Tennessee fulfill their dreams.”  One of the ways, he explains, is to increase funding for higher education.  He lays out tables comparing Tennessee with the rest of the states in the Southern Regional Education Board (SREB).  His tables appear to show that Tennessee is lacking in funding thus our percentage of college graduates is suffering.  He points to the marked percentage increase in higher education spending of other southern states compared to us but this is grossly misleading.  Without knowing the size of the state’s population, it’s impossible to determine if the amount that particular state is spending on higher education is more or less than the average. 

The best way to determine education funding is to figure it per capita.  In other words, how much are we spending per person in this state on higher education?  Once those figures are revealed it becomes crystal clear that there is absolutely no correlation between spending and the number of college graduates.  There are two states that match up exactly in rank for per capita spending and graduation rate but they are the exceptions and certainly not the rule.  For instance, out of the 15 states listed, Mississippi spends the most per capita on higher education yet their percentage of persons with bachelor’s degrees is 12^th.  Conversely, Florida is dead last, 15^th, in per capita spending but their percentage of graduates is 7^th.  Texas is 13^th out of 15 states in spending but their percentage of graduates is 3^rd.  The top SREB state in graduate percentage, Maryland, is 8^th in per capita spending.  (See Table 1)

Another salient point that was gleaned from the governor’s tables is that although our spending on higher education has increased by 15 percent over the last five years, our percentage of persons with bachelor’s degrees has actually gone down slightly.  Again, there is absolutely no correlation between spending and graduation rates.

In total, the governor proposes spending about $246 million more this year than last on K-12 education.  However, if he gets one penny less, he calls it a cut.  It’s a cute little trick he learned in Washington that turns the difference between what you want and the increase you actually get into a cut.  It’s like going to your employer and asking for a $10,000 raise.  Instead, he gives you a $5,000 raise and you complain that he just cut your pay!  That’s exactly what’s going on with the word games being played by the pro-income taxers.

Table 1

Southern Regional Education Board States	Per Capita Higher Education Spending (rank)*	Percentage of Population with Bachelor’s Degree (rank)+
Alabama	$259.61 (3)	21.8% (6)
Arkansas	$229.56 (6)	17.3% (15)
Delaware	$233.62 (5)	24.0% (4)
Florida	$172.60 (15)	21.6% (7)
Georgia	$190.84 (12)	21.5% (8)
Kentucky	$246.46 (4)	19.8% (11)
Louisiana	$197.07 (11)	20.7 (10)
Maryland	$218.60 (8)	34.7% (1)
Mississippi	$308.60 (1)	19.2% (12)
North Carolina	$292.93 (2)	23.9% (5)
South Carolina	$216.59 (9)	20.9% (9)
Tennessee	$181.01 (14)	17.7% (14)
Texas	$188.99 (13)	24.4% (3)
Virginia	$226.78 (7)	31.6% (2)
West Virginia	$214.77 (10)	17.9% (13)

* Based on 2002-2003 Budget, page B-97 and U.S. Census estimates for July 1, 2001

+ 2002-2003 Budget, page B-96

Here are just a few of the items “for the children” the governor proposes we buy with your tax dollars.  Keep in mind that he claims we’re in a budget crisis.[3]

It seems that if we’re truly in a budget crunch, these items could wait or be funded by private donations.

 

Reading Is Fundamental

The governor is back again this year with his Reading Initiative program that would spend some $90 million to teach kids how to read by the end of third grade.  This should be an insult to every taxpayer in the state.  In this state, our education system is called the Basic Education Program.  If learning how to read isn’t part of a basic education, what is?  If the schools aren’t teaching kids how to read, what are they teaching them?  They learn everything there is to know about the rain forest but they can’t read?  This is not a problem of money.  It’s a problem of priorities.  There is no excuse for having third-graders who don’t know how to read. 

If we're really serious about teaching kids in K-2 the basics we should concentrate only on the basics until they are mastered.  Requiring that K-2 students "name community health workers" and "identify agencies within the community that provide health services" in order to become "aware of and appropriately use health services, practices and products" seems like a waste of time and resources if these same students are producing dismal reading scores.  Yet, that's just an example of the prescribed learning in Tennessee schools.[4] Other learning requirements for Tennessee K-2 include:

 Develop an understanding of dance as a response to experiences and the environment.[5]

Some of these things are fine but not at the expense of learning how to read and do basic math.  Again, it’s not a matter of money.  It’s a matter of priorities.  Although, to look at the governor’s statistics, kids are doing just fine in school but figures can be deceiving. 

According to the governor’s budget, 97 percent of students in public school are promoted to the next grade.[10]  If we have such a large problem of kids not knowing how to read, why are we shuffling them through to the next grade?  There are all sorts of ways to help children who are falling behind in reading that won’t cost a dime.  One suggestion is to ask parents to volunteer their time to help these kids.  This can be done before, during or after school.  Most every adult knows how to read and can help with this task.  Ideally, the parents or parent of the student should take responsibility of and interest in their child’s education.  Holding parents more accountable for their child’s progress would go a long way in solving the problem.

Another suggestion is to make sure they’re teaching phonics.  You’ve probably noticed that the phonics market has exploded over the past few years.  That’s because, believe it or not, many schools aren’t teaching phonics anymore or have de-emphasized phonics.  That’s probably a contributing factor as to why we have kids who can’t read in the 3^rd grade.  These phonics games are very effective and relatively inexpensive.  They can be purchased by parents or through school fundraising efforts. 

Several years back, the state decided that reducing class size was the answer so we spent hundreds of millions of dollars toward that goal.  Test scores remained about the same and, in some cases, even went down.  In an effort to lower the class size we compromised on teacher quality.  The goal was to get those class sizes down no matter what so, in some cases, we stocked classrooms with sub-standard teachers.  I would rather have my child in a class with 30 other students and a great teacher than one-on-one with a bad one.  We have to use some common sense when it comes to education.  The simple truth is throwing more money at education does not equal better education.  It’s time we stopped equating the two and started looking at innovative ways to educate our children.

Improvements – Budgetese for Spending Increases

Each year the governor’s budget lists improvements.  This is budgetese for spending increases, which is such a vulgar term, isn’t it?  You’d think that in this so-called budget crisis that ‘improvements’ would be kept to a bare minimum but hold onto your hat.  Keep in mind that the consumer price index as of February 2002 was increasing at an annual rate of about 1.1 percent.[11]  Take a look at just a few of the departments in state government and how much the governor wants to increase them.  These increases are just for one year!  By the way, many of the percentage changes in the governor’s budget were wrong.  I’m not saying that it was an attempt to mislead but, by coincidence, almost all of the mistakes make the percentage of growth look much less than it actually is.[12]  Here are some departments and their correct percentages of growth.

That Miscellaneous Appropriations figure includes a 5% pay raise for state employees to the tune of about $50 million.[13]  That’s on top of the 3% raise they got last year.  Not that I have anything against the state employees but if we’re in a budget crisis we don’t need to be handing out raises, especially at three times the rate of inflation.  This doesn’t include the compensation classification adjustments, meaning people move up the ladder and get a raise.

If we’re truly in a budget crisis, the governor should’ve insisted on a freeze in growth.  Understand, it’s impossible to freeze everything.  Some portions of the budget are court mandated while others require increases to receive matching federal funds.  Still, a whole lot more could’ve been done by this governor to hold the line of spending.  It is outrageous that any program under his purview would be expanded at any level above the rate of inflation.  Increasing these programs during a soft economy is simply irresponsible.

When Is A Cut Not A Cut?

Deleting items from the governor’s proposed budget, in reality, cuts nothing from the current budget.  However, as explained earlier, those who were expecting these goodies will scream bloody murder when they don’t get them.  Politicians and bureaucrats use this ruse every year and the news media almost always fall for it.  Once you start looking, you’ll notice the terminology in the newspapers.  So-and-so proposes cutting this or slashing that.  What they’re talking about cutting or slashing is spending that only exists on paper and in the minds of those who would receive this largess.  Very rarely are they talking about reducing the funding of an existing program.  Even this year, when we’re in a supposed budget crisis, the governor sent down another bloated budget.  He talks about how much they’re having to cut but that’s out of his proposed spending increases.  If we’re actually cutting, explain to me why this budget is $1.1 billion bigger than last year’s budget.  That’s a 5.4% increase in spending.  Since we’re not bringing in as much money this year in taxes as we did last, the only alternative to funding all this growth is new taxes.  That’s exactly the aim of the governor.  He hopes to dangle these items in front of enough faces to garner support for funding them through an income tax.  In the process, he cries that we’re having to cut spending!  The governor continues to spread the lie that we’re cutting government when, in fact, we are not.

In my proposed cuts to his proposed 2002-2003 budget, I still leave over a half billion dollars worth of spending increases intact.  Most of these are either court mandated or required by the federal government in order to receive matching funds.  Take a look.  Surely we can wait another year on these items until our economy fully rebounds.

The Chopping Block

The following items, in my opinion, don’t need to be funded at this time.  That’s not to say that they don’t have merit (some do, some don’t) but when you’re in the middle of a budget crunch you don’t need to be spending money you don’t have.

Chopping Block Total Savings - 339,980,000

TennCare

TennCare continues to be the behemoth that everyone’s afraid to tackle.  It continues to grow, year after year, with no end in sight.  Its supporters claim that it is more efficient than the old Medicaid program it replaced and, on that point, they are correct.  On a per-patient basis, TennCare appears to be more cost effective than most other systems in the country.[14]  Here's the problem.  We have far too many people on it in Tennessee.  Let's take North Carolina, for example.  Their population is 70 percent larger than ours yet we spend more on TennCare than they do on Medicaid.  Their poverty rate is comparable to ours, 12.6 percent compared to 13.6[15], yet almost 1 in 4 Tennesseans is on TennCare[16] while only about 1 in 10 North Carolinians is on Medicaid.[17]  To put it in simpler terms, North Carolina is 70 percent larger but Tennessee has 55 percent more people on public medical assistance. Their system is also county administrated and state supervised, giving more control to the local agencies, but one could argue that this creates another layer of bureaucracy, making the whole system more inefficient.  The truth is, North Carolina spends considerably more per person than Tennessee.  Tennessee simply has a disproportionate number of people on the program. 

Recent data available on Medicaid and poverty rates show that about 86 out of every 100 poor residents nationwide receive Medicaid.  In Tennessee, that number is a shocking 151 recipients of TennCare for every 100 poor residents.[18]  You need look no further than that figure to understand why TennCare is breaking the state.  Those who don’t deserve state and federal assistance are getting it through TennCare.

It’s also important to understand why so many people are getting on TennCare.  It is certainly more attractive than Medicaid, which it replaced, and is preferable to many private insurance plans.  Many of the restrictions of Medicaid, designed to hold down costs, were abandoned under TennCare.  Hospital and doctor visit limitations imposed by Medicaid were designed to cut down on abuse.  These limitations were abolished under TennCare. (See Table 2)  We’ve created a magnet instead of a safety net.  Like moths to a flame, people have been flocking to Tennessee because they can instantly sign up for TennCare.  Employers have also found it tempting to encourage their high-risk employees to jump to TennCare.  If TennCare weren’t so desirable these employees would complain but it’s a win-win situation with employee and employer ending up happy.  The loser is the taxpayer who has to pay for it all.  TennCare has to be a bare-bones plan with no frills in order to discourage jumping from private insurance to TennCare.  It should not even come close to competing with private health insurance.  That’s not to say that TennCare patients shouldn’t be taken care of but we should not be creating a program that lures patients away from private insurance.

Table 2

TennCare Benefits

Service                                           Former Medicaid                                                 TennCare

Hospital inpatient                         Payment reduced to 60% of per diem                     No limits                                                       after 20 days/year Hospital outpatient                       30 visits per year                                                     No limits Psychiatric facility, ages 21–65    Not covered                                                            No limits Physician inpatient                      20 visits per year                                                      No limits Physician outpatient                    24 visits per year                                                      No limits Lab and x-ray                              30 occasions per year                                              No limits Home health                                60 visits per year                                                     No limits Pharmacy                                    7 prescriptions/refills per month                               No limits   Source: The Urban Institute

 

We nearly double the national average in Medicaid enrollment as a percentage of population, leading every other state in the nation at 20.1 percent.  By comparison, California is only at 14.8 percent and Kentucky at 14.2 percent.[19] 

Before there was TennCare, there was the Tennessee Comprehensive Health Insurance Plan (TCHIP) which provided health coverage to the state's uninsurables.  At the end of 1993 we had 3,433 people on the program.  After TennCare was enacted, the number of uninsurables ballooned to 113,951 by April of 1999.[20]  That’s a 3,219 percent increase!  Between that huge increase in uninsurables and leading the nation in Medicaid enrollment as a percentage of population, it’s apparent that we have entirely too many people on the program.

Right at 25 percent of Tennesseans are on TennCare.  Now, let's just suppose for a moment that we had the same percentage of people on TennCare as the national average, 10.4 percent.  That would translate into a savings of over $670 million in the state's portion of TennCare per year and about four times that amount for the federal portion.[21]

TennCare Savings - $670 million

Additional Savings

Instead of increasing some departments’ spending by 11 and 12 percent, I propose limiting any department to a 3 percent increase, which is more than the rate of inflation and population growth.  Zero growth in spending would be preferable to me but in the spirit of generosity, I chose a 3 percent increase.  I exclude miscellaneous spending from the list below since I’ve already cut a chunk of that in the ‘Choppy Block’ section.  I also exclude TennCare because I calculated that separately in the ‘TennCare’ section.  Below is a list of departments and how much would be saved if their increase were limited to 3 percent.

Total Additional Savings - $119.5 million

Total (Additional Savings & Chopping Block Items) - $399 million

Total (Above total with TennCare savings added) - $1.1 billion

Understand that these are state dollars only, for the most part.  We made every effort to extract the state portion from the total.  If federal dollars were included, the savings would be far greater.  Also, these aren’t the only savings to be found in the budget.  Although the governor’s budget is 370 pages long, a lot of the details are hidden from view.  What we don’t see are all the smaller frivolous expenses that add up to big numbers.  We also don’t get to see all the money the state has squirreled away in various nest eggs that don’t show up on any budget.  A comprehensive audit of every department needs to be made by a disinterested third party.  I believe this is the only way to streamline government effectively.  Up until this point, the governor and the general assembly have resisted such an audit.

Summary

You don’t have to be a trained accountant to look at the items the governor wants and realize that we could do without most of it.  The reason we find ourselves in this same place each year is because we estimate how much revenue will come in over the next 12 months.  Freezing the budget one year and allowing the revenue to surpass the spending could very easily solve all of this guessing about revenue.  At that point, you have money in hand and you can budget knowing exactly how much you have to spend.  No more planning a new building then having to rob Peter to pay Paul so you can build it because tax revenues didn’t meet your expectations.  Forecasting revenue is more difficult than forecasting the weather.  If the bean counters who come up with these estimates were right, they’d already have made a trillion dollars playing the stock market.  The fact is, they don’t know what’s going to happen.  None of us do so we need to stop trying.

The people need the power to decide tax issues.  Like Colorado, we need the power to limit government spending to the inflation rate plus population growth.  Since the governor and the general assembly can’t seem to come to terms on taxing, it needs to be put before the people.  It’s obvious that we can’t trust our elected officials to be good stewards of our money.  Laws need to be passed that limit their spending.  The problem is, they make the laws.  However, there are some very good people in the general assembly.  Once this governor is gone, these good people need to work with the new governor to place caps on government spending so we don’t find ourselves back in this same boat.  It’s like with an alcoholic, sometimes you just have to take the bottle away from them.  Some of our elected officials are spendaholics and we have to take the checkbook away from them.  The pro-income taxers and the big spenders continually cry that it’s for the children.  If they really want to do something for the children, they’ll let their parents keep more of their own money.

 

Reference Notes