Gov. Don Sundquist’s tax proposals could make state revenues varied and harder to project at first but more stable in the long run, a University of Tennessee economist said Wednesday.
Dr. Matt Murray, director of UT-Knoxville Center for Business and Economic Research, said the governor’s plan to remove taxes on food would eliminate one of the least volatile sources of state revenues.
“Food consumption changes little over the course of the ups and downs of the business cycle and is a very stable element of our sales tax,” Murray said. “We do not see food consumption grow as rapidly as, say, personal income.
“Small growth potential of the food tax has been a problem, but it has been a reliable, stable source. Removing it could have a ripple effect other collections and at least temporarily cause variations in overall sales tax revenues and less certainty in projections.”
On the other hand, Sundquist’s plan to replace state corporate income taxes with a simpler tax based on company payroll and income could plug loopholes in business taxes, Murray said.
That would make revenues from corporate tax sources more stable, he said.
“It (the new business tax plan) could create a broader tax base, similar to having a broader portfolio if you were investing in the stock market,” Murray said.
“It could potentially enhance revenue stability and forecasting of business taxes over a longer time horizon.”
Murray said the proposals make the state tax structure less regressive and could ease the state’s heavy reliance on volatile, difficult-to-project sales tax revenues.
The plan is expected to add $400 million to state coffers, but Murray said how the money is spent is as important as how much is raised.
“Research shows that properly spent government expenditures can promote and encourage economic development,” Murray said. “If we generate more tax revenues from people and businesses in Tennessee, we must make sure we expend those additional dollars to enhance state prospects for economic growth.
“That is perhaps the most critical piece of this legislation.”
Contact: Mike Bradley (423-974-2225)
Dr. Matt Murray (423-974-5441)