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State and Local Revenues Were, Prior to This Century, Made up Almost

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State and Local Revenues Were, Prior to This Century, Made up Almost OPTIONS FOR TENNESSEE’S TAX SYSTEM: A PROSPECTIVE PORTFOLIO ANALYSIS By Rose M. Naccarato Dissertation Submitted to the Faculty of the Graduate School of Vanderbilt University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY in Leadership and Policy Studies August, 2006 Nashville, Tennessee Approved: Kenneth K. Wong Stephen Buckles Stanley Chervin Malcolm Getz Mark W. Lipsey To my daughter, Sophia Marie whose impending arrival inspired me to finally complete this project and To my husband Mark, whose endless patience and support made this possible ii ACKNOWLEDGEMENTS All of the members of my Dissertation Committee, past and present, helped to make this possible, with their patience, support, and knowledge. I also owe my thanks to Dimitri Shvorob, whose extensive SAS knowledge and patience for the many times I revised my input data made the analysis in this paper possible. My family has always been there for me, encouraging me to finish and expressing their pride in my work. I would especially like to acknowledge my mother and stepfather, Richard and Mary Oshlag, whose nagging kept the project on my mind, even when I was not working on it. I must also give special recognition to my husband Mark, who always believed I would finish this in the end. Without them, I likely would have abandoned this project some time ago. iii TABLE OF CONTENTS Page DEDICATION................................................................................................................................ ii ACKNOWLEDGEMENTS........................................................................................................... iii LIST OF TABLES......................................................................................................................... vi LIST OF FIGURES ...................................................................................................................... vii Chapter I. INTRODUCTION .....................................................................................................................1 A History of State Taxation .................................................................................................1 States in Fiscal Crisis...........................................................................................................6 Recession .......................................................................................................................9 Medicaid ........................................................................................................................9 Court Rulings...............................................................................................................10 Tax Systems.................................................................................................................10 Corrections Policy........................................................................................................11 II. EVALUATING STATE TAX SYSTEMS..............................................................................12 Criteria ...............................................................................................................................13 Efficiency.....................................................................................................................14 Sufficiency ...................................................................................................................14 Stability........................................................................................................................15 Equity...........................................................................................................................15 Simplicity.....................................................................................................................16 How Different Types of Taxes Rate on the Criteria..........................................................17 Sales Tax......................................................................................................................17 Income Tax ..................................................................................................................20 Business Tax ................................................................................................................22 Excise Taxes ................................................................................................................24 State Lotteries ..............................................................................................................26 Optimal Taxation Theory...................................................................................................29 The Portfolio Approach .....................................................................................................35 Micro-Simulation Tax Models...........................................................................................49 III. THE TENNESSEE TAX SYSTEM ........................................................................................55 iv A Brief History of Taxation in Tennessee .........................................................................55 Tennessee’s Current Tax Structure....................................................................................67 Does Tennessee Need Tax Reform?..................................................................................69 IV. METHODOLOGY ..................................................................................................................74 Taxes Currently in Use ......................................................................................................74 General Sales and Gross Receipts................................................................................75 Corporation Franchise Tax ..........................................................................................76 Corporation Net Income Tax .......................................................................................76 Hall Income Tax ..........................................................................................................77 Taxes Not Currently in Use ...............................................................................................77 Motor Vehicle Tax.......................................................................................................77 Income Tax ..................................................................................................................78 State Real Property Tax ...............................................................................................79 Constraints .........................................................................................................................80 Equity...........................................................................................................................80 Efficiency.....................................................................................................................80 Competitiveness...........................................................................................................81 Simplicity.....................................................................................................................81 Sufficiency ...................................................................................................................81 Data Analysis.....................................................................................................................82 V. MODEL ...................................................................................................................................83 VI. RESULTS AND POLICY RECOMMENDATIONS .............................................................87 Static Models .....................................................................................................................87 Optimization Results..........................................................................................................93 The Current System .....................................................................................................93 The Commission’s Proposed System with an Income Tax .........................................98 The Commission’s Proposed System with a Motor Vehicle Tax and a Real Property Tax...............................................................................................................102 All Major Taxes .........................................................................................................106 Policy Recommendations.................................................................................................109 Appendix SAS PROGRAM LANGUAGE USED TO RUN OPTIMIZATION ...................................119 BIBLIOGRAPHY........................................................................................................................126 v LIST OF TABLES Table Page 1. Tennessee Tax Revenue and Tax Base Information................................................................70 2. Tennessee’s Current Tax System.............................................................................................88 3. Tennessee Tax Structure Study Commission Proposal One....................................................89 4. Tennessee Tax Structure Study Commission Proposal One....................................................92 5. Current Tax System Optimization Results ..............................................................................94
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