Abstract
This study evaluates the adequacy of the Tennessee tax system. For Tennessee, this problem is essentially a study of the state sales and use tax, as this tax dominates the state revenue system.
Highlights
In the literature on state and local taxation, the concept of adequacy is normally defined as the ability of a tax or tax system to provide for revenue growth that keeps pace with the growth of the local economy without the need for continued modification of tax rates or tax bases.' For most states, adequacy has been an elusive standard of performance either due to over reliance on income inelastic commodity based consumption taxes or a mismatch between tax system emphasis and sources of economic growth (Weidenbaum, 1967)
Three estimates are presented: an ordinary least squares estimate (OLS), an estimate corrected for autocorrelation (AUTOREG), and a seemingly unrelated regressions estimate (SUR)
The purpose of this section is to investigate the implications of instituting a flat rate in· come tax in Tennessee based on federal income tax definitions
Summary
In the literature on state and local taxation, the concept of adequacy is normally defined as the ability of a tax or tax system to provide for revenue growth that keeps pace with the growth of the local economy without the need for continued modification of tax rates or tax bases.' For most states, adequacy has been an elusive standard of performance either due to over reliance on income inelastic commodity based consumption taxes or a mismatch between tax system emphasis and sources of economic growth (Weidenbaum, 1967). For Tennessee, this problem is essentially a study of the state sales and use tax, as this tax dominates the state revenue system. As an illustration of the problem faced by Tennessee, consider the fact that during the 1970-80 period the rate and base of the state sales tax had to be modified six times (Biennial Report, 1982). This suggests that the Tennessee tax system was insufficient to meet expen· diture demands during a period characterized by sizable federal to state intergovernmental transfers. The rate has been raised three times: from 2.0 percent to 3.0 percent in 1956, from 3.0 percent to 3.5 percent in 1972 and from 3.5 percent to 4.5 percent in 1976.2
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