Tax Free Tennessee has an interview with Governor Phil Bredesen. I found this link via Hobbs Online, a great source of information on the Tennessee income tax issue, including the discredited University of Tennessee study on the effects of e-commerce and over-hyped news coverage of revenue shortfalls.

A conservative, Bill Hobbs has been supportive of Democratic governor Phil Bredesen's handling of the state budget, and his fair play on the income tax issue:

I genuinely feel that I ran for this office and was elected on the premise that I was not going to propose an income tax during my term as governor and I have no intention of doing it. I guess if I were convinced that was far and away the best way to do something, I would want to give people a referendum chance and by making it clear that I intended to explore that alternative in a second term in governor and making it clear during the campaign.

I'm not opposed to a state income tax, though I agree with Hobbs that we should have a tax-payers bill of rights. If Maclin Davis is right about the constitutionality of a state income tax, we'd have to change Tennessee's constitution anyway, so we should guarantee our rights if we're granting the state the right to collect income tax:

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.

Without the income tax, Tennessee relies on sales taxes for over half its revenue. Consequently, the state sales tax is high (8.25%; 9.25% with local taxes in Knoxville), and widely-charged (among other things, it applies to food, clothes and medicine). That makes it especially grievous to people, like my retired mother, who live on a fixed income. Without sales tax, the part of her Social Security check that goes to food and medicine would stretch 9.25% further each month.

When a government depends on sales taxes, it will seek to expand its tax base by expanding the range of goods and services that are taxed. We faced this back at U.S. Internet, when the state wanted Tennessee ISPs to collect sales tax on Internet service, which was a recent innovation. This put locally-owned and -operated providers like us at a disadvantage against large national ISPs like AOL and EarthLink, who didn't have to charge Tennessee sales tax. In a great example of leadership, our CEO, Will Henderson, organized other ISPs in the state. We all banded together to lobby the tax department to change its ruling and won.

State sales taxes also create bizarre financial distortions. At my current job, we sell and ship networking equipment all across the country and even around the world. Yet the only place we charge sales tax is Tennessee. A Tennessee company who wants to do business with another local company pays a 9.25% sales tax penalty compared to doing business with an out-of-state company that doesn't have a nexus in the state.

I'm in favor of a limited income tax if it can get us away from dependence on a regressive, distortive sales tax, and if it's paired to a constitutional amendment for a taxpayers bill of rights.

Congress is considering a plan to temporarily cut the tax on stock dividends. The tax would be cut in half for 2003, eliminated entirely in 2004 through 2006, and reinstated in 2007, barring a possible extension.

Jacob Levy at the Volokh Conspiracy weighs in on why this is a bad idea:

The arguments in favor of repealing the dividend tax have to do with removing distortions from the capital markets and from the incentives faced by corporations, and with improving transparency in corporate accounting. Removing distortions from the capital markets is a good thing for long-term growth. This tax cut is not a short-term stimulus, still less a short-term stimulus to the stock market. The desirable effects that it is supposed to have would all be defeated by a three-year sunset clause; corporations aren't going to restructure their debt practices, their dividends vs. stock buyback practices, for such a short-term provision. If one wants to go the Keynesian route, then the taxes to cut aren't those that have to do with capital allocation and corporate governance. I think it would be better to have a coherent supply-side tax cut (say, a small permanent reduction in the capital gains tax) or a coherent Keynesian cut (a three-year increase in personal exemptions) or a combination of the two or... well, anything that at least might be intelligible. Instead, Senators are voting for something that no one's theory or argument predicts will do anything useful.

Warren Buffett, the world's second-richest man and CEO of Berkshire Hathaway, is against the dividend tax cut despite the fact that it would make him even richer:

Administration officials say that the $310 million suddenly added to my wallet would stimulate the economy because I would invest it and thereby create jobs. But they conveniently forget that if Berkshire kept the money, it would invest that same amount, creating jobs as well.

The Senate's plan invites corporations -- indeed, virtually commands them -- to contort their behavior in a major way. Were the plan to be enacted, shareholders would logically respond by asking the corporations they own to pay no more dividends in 2003, when they would be partially taxed, but instead to pay the skipped amounts in 2004, when they'd be tax-free. Similarly, in 2006, the last year of the plan, companies should pay double their normal dividend and then avoid dividends altogether in 2007.

Overall, it's hard to conceive of anything sillier than the schedule the Senate has laid out. Indeed, the first President Bush had a name for such activities: "voodoo economics." The manipulation of enactment and sunset dates of tax changes is Enron-style accounting, and a Congress that has recently demanded honest corporate numbers should now look hard at its own practices.

Instead, give reductions to those who both need and will spend the money gained. Enact a Social Security tax "holiday" or give a flat-sum rebate to people with low incomes. Putting $1,000 in the pockets of 310,000 families with urgent needs is going to provide far more stimulus to the economy than putting the same $310 million in my pockets.

When you listen to tax-cut rhetoric, remember that giving one class of taxpayer a "break" requires -- now or down the line -- that an equivalent burden be imposed on other parties. In other words, if I get a break, someone else pays. Government can't deliver a free lunch to the country as a whole. It can, however, determine who pays for lunch. And last week the Senate handed the bill to the wrong party.

Due to an error made by tax experts in studying the tax dividend cuts, they will actually take $70 billion more from federal coffers than originally estimated, if Congress passes the plan.

ADDENDUM: Despite this lunacy, I think we do need to reform dividend taxes. As it is, dividends are taxed twice: the corporation pays taxes on its profits, then pays dividends to investors, who pay taxes again. Double taxation is fundamentally wrong.

Dividends are good for the stock market, because they promote fiscal honesty. Companies can try to cook their books, but if they're paying dividends the money has to come from somewhere. While a lot of stocks fell in the last crash, the stocks of companies that paid dividends fell less than others. As an investor, I'm in favor of anything that makes the current stock market less susceptible to crooked accounting.

Like Jakob Levy, I'm in favor of removing the double taxation at the corporate level rather than the individual level. For one thing, it gives CFOs a reason to give bigger dividends. For another, corporations are taxed at around 35%, while individuals are taxed at lower levels, particularly for long-term investments.

Finally, I believe that if the IRS is going to tax anything, they should tax dividends, capital gains, and other investment income rather than regular income. There's no reason the guy who builds Fords for a living should have to pay income tax, while the guy who daytrades Microsoft stock or the gal who lives on a trust fund gets a free ride. Building Fords forms the basis of an economy. Swapping stocks on Ameritrade doesn't.