Nation's Largest Taxpayer Group Slams Study's Flawed Findings on Naifeh's State Income Tax Plan

5/21/2002

From: Jerry W. Terry or Pete Sepp, 703-683-5700, both of the National Taxpayers Union (NTU)

ALEXANDRIA, Va., May 21 -- A study released last Friday in support of a proposal to institute a broad-based state income tax overlooks a great deal of existing research pointing to the dangers of such a plan, according to findings reported today by the 335,000-member National Taxpayers Union (NTU). The group has nearly 5,500 members in the state of Tennessee.

"Supporters of Speaker Naifeh's income tax plan would rather mislead Tennesseans with flawed statistics than confront the real source of Tennessee's budget problem: their own bloated spending habits," said NTU President John Berthoud. "In fact, a mountain of evidence shows that a state income tax would fuel government, stall the economy, and leave all Tennesseans with a bigger tax bill."

According to Berthoud, who holds a Ph.D. in Political Economy from Yale University, last week's report, conducted by the public employee union-backed Institute on Taxation and Economic Policy (ITEP), contains a number of flaws and omissions:

-- "Sin" Tax Hikes Soak the Poor. In touting the savings that would supposedly result for lower-income households from the Naifeh plan's sales tax provisions, ITEP fails to account for the proposed increases in alcohol and tobacco taxes. A study by Congress's Joint Committee on Taxation found that 2/3 of federal tobacco taxes already come from those earning less than $40,000. A Tax Foundation analysis determined that all told, federal excise taxes (similar to those in the Naifeh plan) hit households with less than $10,000 of income five times harder than households making $500,000 or more. Thus, the proposed "savings" to many working-class and poor families would be much less than advertised.

Furthermore, despite ITEP's assertion, loading a $1.1 billion tax hike on the backs of Tennesseans with incomes of $38,000 or more would hardly seem "fair" to many taxpayers.

-- Worse Economic Performance. Income taxes penalize productivity and job creation more severely than most other taxes. A study prepared for NTU's research affiliate used econometric modeling to analyze the effects of income taxes in the nine states that have most recently adopted them, and applied the results to Tennessee. According to this research, had Tennessee adopted an income tax in the year 2000, citizens would lose a total of $305.1 billion in personal income (in constant dollars) over the 20 years that would follow. The per-capita income loss between 2000 and 2020 would add up to $46,737.

-- The Problem Is Spending. Lawmakers who hope to use the ITEP study as political cover for a tax hike can't hide from chronically-bloated budgets. Tennessee spending is $3.87 billion higher in 2001 (after inflation) than in 1995, the year Gov. Sundquist took office. Ironically, an income tax would make this spending problem even more difficult to manage. In seven of the nine income-taxing states mentioned above, state government spending grew significantly faster after adoption of an income tax than in the 2-4 decades before adoption -- again, adjusting for inflation.

"There's nothing 'fair' at all about burdening hard-working Tennesseans with a $1.1 billion tax hike," Berthoud concluded. "If lawmakers truly want to be fair to Tennessee taxpayers, they must stand up to special interests and curb their big-spending budget plans instead."

------ NTU is a non-profit, non-partisan organization working for lower taxes, less wasteful spending, and taxpayer rights at all levels. Note: The Tennessee income tax study prepared for NTU's research affiliate is available upon request. More information on state fiscal policy is available online at http://www.ntu.org.