David Fowler President

January 5, 2009

Rep. G.A. Hardaway (D-Memphis) is proposing a one-cent reduction in the state sales tax on food.  Most folks have no problem with any tax being lowered, but having had to vote on such things, I can tell you that such a straightforward proposal is not so simple for the politician.  There’s more to consider than meets the eye.

No doubt Rep. Hardaway’s bill will be applauded by some as a sincere effort to  help the poor in tough economic times and viewed by others as a political ploy, even if no one dares say it publicly.  Regardless of his motives, there are a number of things that politicians will have to consider that will make this vote a tough one.

Unfortunately, many will consider the politics of the issue first, namely, how will voting against a tax reduction look in a campaign mail piece by my opponent in 2010.  Just like those already jockeying for Governor in 2010, campaigns are never far from the minds of most incumbents. 

Republicans, who are supposed to be for lower taxes, may find it hard to explain why they were not for lower taxes, particularly if they talked about it in a mail piece in the last campaign, a document someone is sure to turn up in a 2010 campaign.  And, keep in mind, it is not just a Democrat a Republican must fear, but the long term incumbent Republican who has no doubt made some enemies over time, may find it being raised by a primary challenger.  I can think of a few long term incumbent Republicans who felt the sting of such things in losing a primary.  And with Republicans being in control of the House and Senate for the first time since Reconstruction, you can expect Democrats to make sure that voters know the “low tax party” didn’t vote for lower taxes so why leave them in power.  And if Republicans should shy away from some of the “social agenda issues” that many in its base care deeply about, there may be some who agree – perhaps enough to return control to Democrats.

Democrats who vote “no” may find some questioning how committed they are to the “working man.”  As with long term incumbent Republicans, for long term incumbent Democrats this could also be a problem in a primary.  And, in a general election, you can bet that a Republican challenger will make them out to be big government, high tax, big spending Democrats who would never vote for a tax reduction, even on the most basic of necessities.  Of course, in so doing, that Republican will make it harder on himself or herself, if elected, to not vote for the next tax decrease that comes down the pike.

Perhaps this helps explain how ideas that may be shaky when the substance is considered (keep reading) can take on a life of their own.  Bills can pass that a majority, if totally honest, would rather not have voted for because it makes for other harder decisions (keep reading) that they would also rather not have to make.

And perhaps this demonstrates how difficult trying to judge the political affects of a vote can be.  An incumbent can and will be criticized by someone no matter which way he or she votes.  So, my advice to them, should they want it, is to just vote on the merits of the proposal, have a sound reason for your vote, communicate that to your constituents as best you can, and remember that leaving public office is not so bad.  I can vouch for that!

So, what about the merits?  It’s really not so simple either.

If the issue is helping the poor, then this bill will not really help the poorest of the poor (or even anyone very much, for that matter).  The poorest of the poor get food stamps, and the items they purchase with food stamps aren’t subject to sales tax anyway. And, if as The Tennessean pointed out, a family with an annual income of $15,000 spends 20 percent of its income on groceries, while a family making $100,000 spends four percent of its income”  this means that the family making $15,000 will save $30 per year.  Of course, that family may well be on food stamps, and the sales tax reduction will not save them much if anything.  As for the family making $100,000, they save $40 per year, not exactly a life-style changing savings.

Reducing a necessary cost of living like food by even just $30 or $40 per year is really mostly an acknowledgement by lawmakers of tough economic times, but there still is no free lunch.  The reduction in state sales tax will cost the state at least $80 million in decreased revenue and at a time when revenue is already $800 million to $1 billion below the revenue projections on which current year expenditures were based.  So, those voting for the tax decrease will either have to cut an additional $80 million or so in government services or, as some suggested, raise a tax somewhere else, for example, on businesses.  If additional services are cut, then those most likely to be hurt are the very poor who the legislator was trying to help with the tax reduction.  And if the tax is passed on to businesses, they will pass it right back to consumers in the form of higher prices.

There is also the issue of the impact on the steadiness and predictability of our tax revenue stream.  With heavy reliance on consumption taxes, reducing the sales tax on the items most consistently consumed makes our revenue stream less predictable and creates more of a demand that we purchase higher priced items like cars and appliances, purchases that are often delayed when the economy is bad.  At such times, the result can be the kind of deficit we’re seeing now.  Continuing to erode the most stable portions of our sales tax base will result in one of three things when the next economic slowdown comes:  a reduction in government services, an increase in the sales tax on the other items still in the tax base, or a push for an income tax. Raising the general state sales tax even higher will produce diminishing returns as so many Tennesseans, living so close to border states with lower taxes, will do more shopping across state lines.

But these are not the only consequences.  Local governments get a share of state sales taxes. So a reduction in the state sales tax means less state revenue to be shared with local governments.  And local governments, having fewer options for raising taxes than the state, will most likely have to reduce expenditures. And one of the largest expenditures for local governments, if not usually the largest, is K-12 education.

I am not one to say there is no fat in government that can’t be cut.  But without cutting K-12 education funding, which is about 32% of the general fund state tax dollars (which is the fund into which general state sales tax revenue is allocated) cutting $800 million to $1 billion will be hard enough without having to find another $80 million or so.  If 32% of the state’s general fund budget is off the table, other service areas will have to see even larger cuts (Adding to the challenge is the fact that about 23% of the state’s general sales tax revenue goes to Tenncare. Cutting state tax dollars going to Tenncare results in a loss of federal matching funds, making any cut in that service at least twice what it would appear to be).  I am not saying that there is no fat in K-12 education either. But for the politician concerned about the next campaign, cutting K-12 education that serves an overwhelming majority of our population’s children and grandchildren may be more dangerous politically than voting against a decrease in the sales tax on food.

I sure am glad I only write about this stuff now!

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