1.29.09 –For immediate release...

Contacts:

• John Stewart, TFT Board Chair, 865-584-3834 (hm) or 865-806-8115 (cell)
• Brian Miller, TFT Exec. Director, 865-687-9600 x14 (off) or 865-712-8006 (cell)
• Dick Williams, TFT Board Member, 615-252-8507 (hm)

New report shows budget crisis inevitable due to outdated tax system

Tennesseans for Fair Taxation (TFT) released a report today that outlines the underlying problems with Tennessee's tax system, problems that have put the state in a perpetual cycle of budget shortfalls, in both good and bad financial times. According to the report, "This recurring budget crisis is the inevitable outcome of a dysfunctional tax system. The current economic downturn has only sped up and further dramatized a process that would have happened anyway."

Contradicting recent news stories about the growth of government in Tennessee, the report points out that state and local taxes in Tennessee as a percentage of personal income have changed little, and even declined, over the past 30 years or more. Combined state and local taxes in 1977 for example were 9.2% of personal income. By comparison, state and local taxes had dropped to 8.3% by 2008, despite the sales tax increases of 1984, 1992, and 2002 that took place between those dates.

The report notes that the sales tax base has been eroding for decades due to the shift to a service-based economy, growing Internet sales, and changing spending patterns in general. As the sales tax base shrinks, the sales tax rate has been increased to make up for the difference. However, the net impact is that taxes as a percentage of income has remained largely unchanged and even declined slightly.

"I think this is one of the great misunderstandings of the tax debate in Tennessee," states John G. Stewart, State Chair of TFT. "People think taxes have been going up, but the only thing going up is the tax rate as it is applied to a smaller and smaller segment of the economy to raise the same amount of money. But this amount is not sufficient to meet the needs of a growing state. Absent any real change, we will face years of budget deficits, even after the economy recovers."

The report uses an analogy to further explain the point, stating "Imagine if you were a worker whose hourly wage gets cut every year, and you respond by working more hours each year to make up for the difference. While you may be able to maintain your total wage level this way, you're just treading water, and it is simply not sustainable over the long term. The same applies to Tennessee as the combined state and local sales tax rate, already the highest in the nation with an average rate of 9.4%, reaches the breaking point."

"We're facing a huge budget shortfall this year," adds TFT Board member Dick Williams, "and a lot of people are under the impression that it's the souring economy causing all our state budget woes, but that's only part of the story. This would have happened eventually."

TFT supports a comprehensive modernization of the state tax system, including creation of a state tax on income coupled with a significant roll-back of the sales tax on other items and the full repeal of the food tax. TFT is also working to support short-term initiatives to help address the current budget shortfall by closing corporate tax loopholes and unjustified exemptions.

Visit http://www.fairtaxation.org/downloads/structuraldeficit.pdf to download the full report.

# # #