Dr. Arthur Laffer

The often-described “father of supply-side economics” told lawmakers Monday all that’s holding Tennessee back from economic prosperity is a tax on gifts and large estates. Legislation cutting those taxes is being debated this week.

Arthur Laffer, who advised the Reagan Administration, now operates a Nashville-based consulting firm. He says Tennessee has fallen behind other states who – similarly – have right-to-work laws and no income tax.

“In spite of those, Tennessee’s performance has been very poor. And the reason it’s been poor, my view and this is me, is because of the gift and estate tax. You’re taking that very small group of people, the sort of the crème de la crème of the job creators, and forcing them to leave.”

In a report published last month, Laffer calculates Tennessee lost some 220,000 jobs in the past decade. However, the estimates have been criticized by a progressive think tank in Washington, which contends Laffer discounts other factors that may well be responsible for job growth in other non-income-tax states.

The state House passed a bill last week to phase out Tennessee’s inheritance tax. The Senate Finance Committee is scheduled to take it up Tuesday. Further behind is legislation to raise the exemption level of the state’s gift tax.

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Laffer told the committee he recently spent several hours in Memphis with Federal Express CEO Fred Smith.

“And he says he’s getting out of this state if it doesn’t happen. And now, we don’t want to lose FedEx.”

Laffer, himself, moved to Tennessee about five years ago and now consults with activists trying to mold state tax policies. He helped draft a couple of California “propositions,” including one to cap state taxes.

Laffer’s name is tagged onto the “Laffer Curve,” described as “illustrating the tradeoff between tax rates and actual tax revenues.” He says the people who have enough of an estate to be hit by the death tax – which exempts the first million dollars – are key to the state’s economic well-being.

“There’s a little sliver of people who leave. They just happen to be the people that have the money. They’re the job creators. They are the people who take their homes, their businesses, etc. and leave. Tennessee doesn’t get the money from them, and it not only doesn’t get the money from them, it loses all the jobs and output, employment, sales taxes etc. that these people take with them.”

The bill to do away with Tennessee’s estate tax, HB 3760 McCormick/SB 3762 Norris, passed the House 88-8 Thursday.

A bill to raise the exemption level of Tennessee’s gift tax, SB 342 Overbey/HB 336 Harry Brooks, is also on the Senate Finance Committee agenda this week. In the House it’s “behind the budget,” and so is expected to be taken up with the official budget spending document clears the House Finance Subcommittee.

The Institute’s critique, Repealing Estate Tax Will Not Create An Economic Boom, points out that Laffer apparently discounts other factors besides the estate tax that may well be responsible for other non-income tax states that outperform Tennessee.

At least four others, Alaska, Wyoming, Nevada and Texas, benefits from new business activity in mining and in particular in the boom in the energy market, ITEP claims.

Laffer’s report also places no weight on the state’s relatively low percentage of college-trained work force.