PLAZA CLUB LEADERSHIP SPEECH
SENATOR MARK NORRIS
August 3, 2001
I want to thank you for the opportunity to address the “inaugural meeting” of this leadership group. I commend the organizers for their effort in convening this gathering and fostering the organization of another forum for the expression of ideas which may become tomorrow’s solutions.
I was asked to speak on the subject of the “budget crisis”. If there were a budget crisis, it would be a very short speech. There is no budget crisis in the true sense of the word.
There is, however, a crisis of confidence borne out of the legislature’s inability to reform its base budget, reallocate existing revenues from surplus funds to important programs and needs where there is a shortfall, and reduce inefficiencies which cause us to exceed the economy’s annual rate of growth. The real crisis is a Constitutional one.
With all you have heard about how badly Tennessee is performing in education, how lowly Tennessee rates compared to other states, isn’t it surprising that our budget has increased over a billion dollars each of the past two years? In the past ten years, the total state budget has grown by about 96%. The National Governors Association June 2001 Fiscal Survey of States reports that, for the year just ended, Tennessee’s general fund spending grew 9.7% which was faster than all but eleven other states nationwide. The U.S. average was 8.2%. The southeastern states’ average was 6.4%. For the next year now under debate, the Governor’s proposed budget would have increased general fund spending by 9.2% and total appropriations by over 13%.
Personal income growth for the year under debate is projected at 5.8%. The budget actually passed by the legislature, but vetoed by the Governor, increased state spending by 5.2%, well within the annual spending cap imposed by our State Constitution. The trouble is that the increase was funded with settlement funds from the tobacco suit which are “one-time” revenues; non-recurring, but they were budgeted for recurring obligations which, when due in subsequent fiscal years, will create a deficit of more than a quarter billion dollars beginning in fiscal year 2002-2003.
Sales tax revenues have actually been robust during the last seven years. But they have not been robust enough to keep pace with our robust spending, and annual increases in sales tax revenues have had to underwrite increased costs in TennCare which has yet to be reformed.
Did you know that there are over $1 billion in sales tax exemptions on the books? Did you know there are 40 licensed occupations which do not pay the license fee that other licensed occupations pay which costs the state $78 million annually? Did you know that the Governor’s Blue Ribbon Panel recommended over 50 changes to the TennCare Program last year, but none of them have been fully implemented? Did you know that more than five comprehensive budget proposals which did not impose an income tax were submitted to the legislature this year but never considered because parliamentary procedures kept them “on the desk” rather than put up for a vote?
Why is the legislature unable to reform its base budget? Because we cannot get 17 votes in the Senate and 50 votes in the House to do so. And the reason for that is because a sufficient number of legislators who support an income tax either do not understand the Constitutional prohibition against such a tax, or they simply choose to ignore it. As long as they feel that the income tax is a viable alternative to other forms of revenue, they will refuse to consider any other alternatives, and the state will remain in disequilibrium.
The crisis developing, in my opinion, is a constitutional one. The constitutional impediment to an income tax is largely unknown or ignored. No less than three networks were in my law office at the time of the Governor’s budget veto. After the taping of my remarks, and with the cameras off, I inquired of the two news anchors and three videographers whether they knew that the State Constitution was an issue? To a person, none of them did. Never heard of it! At a town meeting in Germantown, a citizen asked me whether it wasn’t “disingenuous” of me to hide behind the Constitution! Just ignore it!
There are two essential truths which must not be ignored. First, the present law of the land is that a general tax on income is unconstitutional in this state. I have spoken with Maclin Davis, the attorney who won the Jack Cole case which most recently so held. The opinion in that case was written by my law partner’s father, Chief Justice of the Tennessee Supreme Court, Allen Prewitt. Here is what Mr. Davis recently wrote on the subject:
“In spite of the tremendous volume of publicity about proposals by Governor Ned McWherter in 1991 and 992, and Governor Don Sundquist and Democrat senators in 1999, 2000 and 2001, for a state income tax, significant facts pertaining to that tax have not been mentioned in the press. The most significant of these unmentioned facts is that the proposed income tax is unconstitutional. The way to tell if a proposed income tax is constitutional is to see what the Supreme Court has ruled as to its constitutionality.
When the Tennessee Constitution was adopted in 1870, Article II, Section 28, contained the sentence,
“The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem.”
In 1932, in Evans v. McCabe, 52 S.W.2d 159, The Tennessee Supreme Court held that that sentence “conferred upon the Legislature the power to tax only one class of incomes”, and “necessarily denied to the Legislature the power to tax incomes of other classes”, and, therefore, that a tax on personal income enacted by the Legislature was unconstitutional.
The Attorney General had given an opinion that the tax was constitutional, but the five Supreme Court judges unanimously ruled that he was wrong.
In 1960, in Jack Cole Co. v. MacFarland, 337 S.W.2d 453, and in 1964, in Gallagher v. Butler, 378 S.W.2d 161, in a unanimous opinion by the five judges, the Supreme Court quoted with approval and followed the ruling of the Supreme Court in Evans v. McCabe. Thus, in those three cases, the Tennessee Supreme Court unanimously ruled that a tax on any class of income other than the income from stocks and bonds is prohibited by the Tennessee Constitution.
The Tennessee Supreme Court is the highest authority on the meaning of the Tennessee Constitution, and those decisions by the Supreme Court have never been overruled. Furthermore, the sentence quoted from Article II, Section 28, of the Constitution has never been amended. Therefore, those decisions are binding on the Governor and the Legislature and cannot be changed by the Governor, the Legislature, or an opinion of the Attorney General. Those decisions can be changed only by a constitutional amendment, or by being overruled by a subsequent Supreme Court decision.
Tennessee Attorney General Paul Summers wrote opinion no 99-217, dated October 28, 1999, to the effect that the Constitution of Tennessee does not prohibit a state income tax. That opinion cites no decision of the Tennessee Supreme Court and no provision in the Constitution as supporting the opinion. That opinion does refer to the cases of Evans v. McCabe and Jack Cole Co. v. MacFarland, in both of which the Tennessee Supreme Court held that a personal income tax statute was unconstitutional.
As a result of the 1971 Constitutional Convention, the Constitution was amended; but the key provision relied on in Evans v. McCabe was left unchanged. That key provision is the sentence in Article II, Section 28, which is still in the Constitution today unchanged, and which states, “The Legislature shall have power to levy a tax upon incomes derived from stocks and bonds that are not taxed ad valorem.” In fact, the call to the 1971 Constitutional Convention expressly prohibited the Convention from considering a personal income tax.
After the Constitutional Convention of 1971, the Attorney General’s office issued an opinion on May 14, 1975, stating, “It is our opinion that realizing and receiving income or earnings is not a privilege that can be constitutionally taxed,” citing Evans v. McCabe and Jack Cole Co. v. MacFarland.
That opinion specifically stated that the call of the 1971 Constitutional Convention contained an express prohibition against consideration of a personal income tax.
The Attorney General’s office issued another opinion on October 27, 1977, stating that under Article II, Section 28, of the Constitution, “The General Assembly is without power to impose an income tax on any income other than on incomes derived from stocks and bonds that are not taxed ad valorem”, citing Evans v. McCabe, Jack Cole Co. v. MacFarland and Gallagher v. Butler. The opinion pointed out that, “Although these cases dealt with the provisions of Article II, Section 28, before its amendment in 1972, the income tax provisions in the amended section were adopted verbatim from the former provisions interpreted by these cases.”
Thus, General Summers’ opinion is not only in direct conflict with three unanimous decisions of the Tennessee Supreme Court, it also conflicts with two prior opinions of the Tennessee Attorney General’s office.
It is settled law in Tennessee at this time that an income tax on any income other than incomes from stocks and bonds is unconstitutional. Since there is no plan to change this by constitutional amendment, this rule cannot be changed by the Legislature or an opinion of the Attorney General. It can be changed only by a Supreme Court decision overruling all three prior decisions of the Supreme Court on this point.
No one can know how the present judges of the Supreme Court would vote if another case involving the constitutionality of an income tax comes before the Court, since none of those five judges has been called upon to rule on a prior case involving that question. However, the Tennessee Supreme Court rarely overrules a prior decision. There is no justification for the belief that the Court would overrule the three prior decisions which held that a state income tax is unconstitutional.”
The second truth which largely remains ignored is that the state constitution also imposes a cap on the amount the yearly growth in spending may increase. It is not permitted to exceed the projected growth rate of state personal income for the calendar year in which the fiscal year begins. The constitutional cap can be exceeded only by a majority vote setting forth the amount by which it is to be exceeded. The problem is that the legislature has exceeded the cap 10 times since 1984 by more than $2 billion; three times under the current administration.
Whether one thinks we need an income tax or not, the only way to resolve the current dilemma is through the straight-forward process of permitting citizens to vote whether to amend the State Constitution to address the issue of taxation and to strengthen the cap on annual spending. This process would take two years if by constitutional convention; five years if by referendum. This is not a long time when viewed from the perspective that budget reform has been under debate in Tennessee for over eighty years.
In the meantime, the legislature must find the fortitude to reform expenditures and reallocate existing revenues to meet the State’s needs. It can easily be done, but not without recognizing that the Tennessee Constitution must not, and will not, be denied.
