In 2023 and 2024, Tennessee lawmakers passed back-to-back multibillion-dollar tax cuts for businesses, pushing the state to rely even more on its sales tax to fund government spending.
Nearly every state economist who presented to the Tennessee funding board Monday noted this tax burden shift as officials considered how to project the state government’s future budget.
“We are more dependent on sales tax than historically we have been,” said Jeff Bjark, the director of research with Tennessee’s Department of Revenue, to the board.
Tennessee is one of the lowest-taxed states in the nation, according to a 2024 report from the think tank ThinkTennessee. But the same report also found that in Tennessee, lawmakers have steadily shifted more of the tax burden from corporations to people, resulting in low-income families having a “higher tax burden than wealthier families and businesses.”
Sales taxes are considered “regressive” taxes and under the state’s sales tax-heavy system, low-income families pay a higher proportion of their income in taxes than any other income group, ThinkTennessee found.
Nearly two-thirds of Tennessee’s $21 billion tax revenue comes from sales tax. The state’s average sales tax rate of around 9.6% is the second-highest rate in the U.S., according to the Tax Foundation.
Don Bruce, a professor of economics at the Boyd Center for Business and Economic Research at the University of Tennessee, told the board that its business tax collections would continue to fall this year as the government adjusted to the corporate tax cuts.
Joseph Newhard, an assistant Professor of Economics at East Tennessee State University, said the business tax cut situation provided “uncertainty,” making it difficult to project how far the revenue would fall.
Tennessee’s funding board meets every November to hear an update of the state’s economy from academics and federal and state officials. The board is tasked with using that information to project how much revenue the state will generate in future years, the first step in Gov. Bill Lee’s 2025-26 budget. It will make an official projections on Nov. 24.
Overall, the economists were optimistic about Tennessee’s outlook, noting that the state continued to outpace the U.S. average in gross domestic product growth and had lower unemployment than the national average.
All the economists acknowledged concerns about President Donald Trump’s tariffs, but noted the tariffs have yet severely impacted Tennessee’s economy.
This article was originally published by the Tennessee Lookout.
