By Erik Schelzig, Associated Press
NASHVILLE, Tenn. — Tennesseans are just weeks away from voting on a constitutional amendment to bar lawmakers from ever imposing a state income tax. The November vote approaches as a new study from ratings agency Standard & Poor’s suggests that rising income inequality has a stronger negative effect on the states most reliant on sales tax revenues compared with those with those more dependent on income taxes.
The S&P report that the affluent tend to save a greater share of their income and spend it on untaxed services, meaning that states are unlikely to see much of an increase in sales tax collections based on the gains among this group.
Regardless of the outcome of constitutional amendment, it’s unlikely that Tennessee lawmakers would seriously consider a state income tax —which has become a toxic political issue since the last serious attempt to impose one failed in 2002 amid raucous Capitol protests that included a brick being thrown through the window of the governor’s office and demonstrators banging on the doors of the Senate chamber while lawmakers sought to conduct their business within.
The Legislature instead passed a 1 percentage point increase to the state’s sales tax rate to generate $933 million in new revenue, which was the last time the state passed a general tax increase.
The public backlash against the income tax proposal championed by then-Gov. Don Sundquist, a Republican, joined by Democratic leadership in the Legislature, led several supporters to retire from office or to their defeat in re-election campaigns.
Republicans, who now hold supermajorities in both chambers of the Legislature, have since voted to phase out the state’s inheritance and gift taxes, and are also taking aim at reducing or eliminating the Hall tax on interest from bonds and notes and dividends from stocks.
The Standard & Poor’s analysis shows that Tennessee’s tax revenue grew an average of 9 percent between 1950 and 1979. It then dropped to 8.2 percent in the 1980s, 5.9 percent in the 1990s and down to 3.8 percent in the 2000s. Since 2009, the average annual growth rate has rebounded slightly to 4.3 percent.
Meanwhile, the study suggests that the gains flowing to the top 1 percent come at a broader cost to society. Not only does rising inequality appear to stunt overall economic growth, but S&P links it to a slowdown in average yearly gains in state tax revenues.
Most economic activity comes from consumer spending, a key driver of growth. But consumers have become increasingly reluctant to spend as median incomes have barely increased over three decades and remain lower than they were in 2007 when the Great Recession began. Median household incomes, adjusted for inflation, were $54,045 in July, about 4.6 percent lower than they were in July 2007.
By contrast, the top 1 percent of earners has prospered for more than 30 years. Adjusted for inflation, their average incomes have nearly tripled to $1.26 million since 1979, according to the IRS. But S&P notes that wealthier individuals tend to spend less of their money, meaning that states are unlikely to see much of an increase in sales tax collections.