November 13, 2008

State budget shortfall could hit $800M

The magnitude of the shortfall facing our state is now likely to rival the shortfalls the state faced in 2001 and 2002. The latest estimates place the budget shortfall for the current year in the $800 million range. The shortfall for September alone was $80 million. This means that when legislators come back in 2009, they will have to retroactively deal with the current-year budget, even though by then it will be more than half-way over. This on top of grappling with the budget for 2009-2010.

Budget cuts will have negative impact on already under-funded public structures

Gov. Bredesen is still stating his intentions are to address it by using the state's rainy day fund, coupled with additional budget cuts. That means more cuts on top of the budget cuts already implemented to a host of public services over the last few years. Click here for the full Tennessean story.

While the Governor and the new General Assembly will likely want to keep the discussion focused on how we can cut our way out of the shortfall, TFT and our many allies will be looking at more productive ways to deal with the challenges facing Tennessee.

One possibility is the closing of corporate tax loopholes by enacting combined reporting. Other business tax loopholes could be closed as well. This approach would add fairness to our tax system by putting small businesses that don't benefit from such loopholes on a more level playing field with their big box competitors. It will also help raise needed funds, but even the best case scenario of $250 million from enacting combined reporting is only part of the solution when the shortfall starts to approach one billion.

Other changes "around the edges" could help ease the shortfall. Ending some unjustified exemptions in the sales tax or rolling back the sales tax break for big ticket items are certainly steps in the right direction. Again though, these fixes have limited revenue potential and would only cover part of the shortfall.

Any of the above solutions, coupled with use of the rainy day fund, could together be used to bring the budget shortfall under control during the coming year. But if the budget shortfalls roll into next year and the year after that, then the options will begin to narrow for policy makers. At that point, the prospects of a comprehensive restructuring of the tax system, including a state income tax coupled with reduction of the sales tax and repeal of the food tax, will clearly grow.