Saturday, July 27, 2002

The Stuff You Learn Just By Looking It Up, Part Two

While researching the story just below, I ran across this link to an article titled "Options for Closing the State Budget Deficit: What Now?" It is a report from a forum held in Concord, New Hampshire.

Why do Tennesseans care? Well, there's this excellent observation by the author, J. Mark Lennon:
This event dramatized the stark contrast between New Hampshire's fiscal situation as viewed from within the state - or more accurately, from inside the State House - and from the outside. "What now?" from the outside appeared to have some compelling and straight-forward answers. "What now?" from within appeared to have no answer at all.

But it's one forum participant, and his own comments, that compel. Tennessee's own Richard Fox, UT Professor of choice for the Sundquist administration for his constant doom-and-gloom pronouncements and wildly innacurate economic predictions. Fox's remarks need no further comments from me.
William Fox, who closed the forum, provided a message as clear and recognizable as Raphael's. Fox first pointed out that his home state, Tennessee, ranks 50th in the nation in the proportion of income taken in state and local taxes. New Hampshire ranks 49th. Tennessee has raised a variety of tax rates 60 times in the past 20 years to meet obligations; it still faces a serious structural budget deficit; and it recently saw its bond rating downgraded by two of the three major rating agencies. New Hampshire has done the same, faces the same, and may experience the same result.

Professor Fox's suggestion: Don't try to fund a predictable structural deficit with the Tennessee patchwork. Identify a revenue source that tends to track increases in spending requirements: one that doesn't grow too fast (encourages free spending); one that doesn't grow too slow (the structural deficit will return); one that's not exposed to excessive cyclical variation (too much money in good years, panic and deficits during downturns); one that's got a broad base and doesn't hammer on one segment of the economy. Use this source to fund baseline spending requirements.

Fox pointedly didn't recommend a specific tax to fill this prescription in New Hampshire. He did, however, point out the pros and cons of several major alternatives. A progressive income tax: meets many of the criteria, but tends to grow too rapidly. Sales tax: typically over-reliant on big-ticket items, exposed to large cyclical downturns, and typically fails to match increases in spending (leading to rate creep or returning deficits). A low, flat income tax: meets criteria of broad base, predictable growth generally equivalent to spending growth, capture of economic strength. Gross receipts tax: can work, can have broad base, best if rate kept low. Business taxes: narrow focus, exposed to dramatic cyclical downturns (and New Hampshire's business taxes are already very high in a nationwide comparison).

The Fox bottom line: A temporary hodge-podge of smaller taxes and tax increases don't solve the problem. Structural deficits will recur if they're not fixed with a structural solution, and the temporary fixes will be harder and harder to come by. There are no perfect taxes, only a selection of options, each with strengths and weaknesses. But a lasting structural solution is preferable to the patchwork alternative.

Ohhh, alright. You knew I couldn't resist!

Fox says a progressive income tax "grows too rapidly." In English, the goverment will soon be awash in taxpayer money sufficient to fund all sorts of extravagance. He recommends a flat tax. But ask yourself this:

Do you for one minute believe that the Democrats, and their running dogs in the press, will for one moment let any IT stay flat? Or do you think, as I believe, that cries of "unfair tax burdens" will soon ring out from the Mississippi to the Appalachians?

Until next time,
Your Working Boy

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