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Tennessee has some advantages over Kentucky. Backward tax policy isn’t one of them.

by Tom Eblen, Kentucky Lantern

Maybe some Kentucky Republicans are right: we do need a wall along our southern border.

Otherwise all those poor and middle class Tennesseans who want to avoid their state’s high sales taxes will keep coming up here and crowding our stores.

Who can blame them? Tennesseans now pay state and county sales taxes as high as 9.75% on virtually everything. Unlike in Kentucky, basic groceries also are taxed, but at a slightly lower rate.

Of course, I’m being facetious about a border wall. We love for Tennesseans to spend money in Kentucky. The more the better. Tennessee does have Dolly Parton. And, says Tom Eblen, an inequitable tax system that Kentucky Republicans are eager to replicate.

But it begs the question of why Tennessee has the second-highest sales tax in the nation, topped only by Puerto Rico. The answer: unlike Kentucky and 40 other states, Tennessee has no income tax. What difference does that make? A lot, depending on who you are.

Income taxes put a larger share of the burden for funding government services on wealthy people, because they earn more money. Sales taxes put more of the burden on poor and middle-income people, who spend a larger percentage of their incomes. The Institute on Taxation and Economic Policy ranks Tennessee’s tax system as the nation’s sixth-most inequitable, while Kentucky is ranked 25th.

Republican lawmakers keep talking about how they want to make Kentucky’s tax system more like Tennessee’s. And they’re working hard to do it. In 2018, they flattened the income tax rate and added new taxes on services, creating a windfall for wealthy people and raising taxes for 95 percent of Kentuckians. People earning between $55,000 and $92,000 a year saw the biggest tax increases, according to an analysis by the Kentucky Center for Economic Policy.

Last year, Republican supermajorities in the General Assembly passed legislation to gradually reduce the income tax, while adding new sales taxes on goods and services. This year, they plan further income tax cuts that will significantly reduce state revenues.

These changes could do serious damage to public services once all the temporary federal pandemic relief money is gone. You can bet more and higher sales taxes are in your future.

The Kentucky Chamber of Commerce, which spends more money than anyone else lobbying the General Assembly, is all-in on these tax changes. In a recent op-ed column, Chamber President Ashli Watts argued that cutting the income tax would create economic growth — just look at Tennessee!

Watts didn’t cite any evidence for her claim. There is none. In fact, the evidence points in the other direction, as Pam Thomas of the Kentucky Center for Economic Policy pointed out in an op-ed column.

Thomas noted that Tennessee does have some economic advantages over Kentucky, but they have nothing to do with tax policy. East Tennessee has the nation’s most-visited national park and a huge Smoky Mountains tourism industry. (Because the Smokies have no coal, they haven’t been strip-mined like so much of Kentucky’s Cumberland Mountains.)

Also, the popularity of country music has helped fuel Nashville’s economic boom.

There is another big contributor to Tennessee’s economic growth that doesn’t get much attention. It’s something I learned about while living in Nashville and Knoxville in the 1980s as a reporter for The Associated Press and The Atlanta Journal-Constitution. Tennessee has received billions upon billions of dollars’ worth of federal infrastructure investment over the past century — far more than Kentucky.

Congress created the Tennessee Valley Authority in 1933 to build dams that reduced disastrous flooding, improved river navigation and provided cheap electricity that attracted new industry. TVA added coal-fired power plants in the 1950s that kept electricity cheap. (And, as a byproduct, encouraged strip-mining that devastated large swaths of Kentucky.)

Even though TVA’s power rates have risen since the 1980s because of mismanaged nuclear plant construction, Tennessee has big energy advantages over states like Kentucky that
have been powered mostly by investor-owned utilities.

During World War II, the federal government put a national research laboratory, a nuclear weapons plant and a uranium enrichment plant at Oak Ridge, Tenn. Those facilities and their offshoots remain among metro Knoxville’s largest employers.

Another World War II legacy is Fort Campbell along the Tennessee-Kentucky border. The Army base now supports nearly 100,000 soldiers, their family members and government contractors. While Fort Campbell has been good for Hopkinsville, it has been much better for Clarksville, Tenn.

Tennessee is well endowed with interstate highways, the modern corridors of commerce.
That’s no accident of geography. One of the biggest champions of the National Interstate and Defense Highways Act of 1956 was Sen. Albert Gore Sr. of Tennessee, father of the future vice president.

State after state has found that the best way to create economic growth is to invest in critical infrastructure and human capital through better education and health care. Shifting the tax burden from wealthy people to everyone else has never created broad-based prosperity — not even in Tennessee.

Kentucky Lantern is part of States Newsroom, a network of news bureaus supported by grants and a coalition of donors as a 501c(3)