published Wednesday, September 28th, 2011

Tennessee has highest average sales tax in the nation

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NASHVILLE — Tennessee shoppers continue to pay the highest average sales taxes in the nation, according to a report issued by the Tax Foundation.

The Washington-based, nonpartisan tax research organization said the statewide average state and local sales tax burden in Tennessee is 9.43 percent for every dollar spent on taxable items.

Tennessee is in a five-way tie with Indiana, Mississippi, New Jersey and Rhode Island for the highest state sales tax rate -- 7 percent.

But local governments' ability to add up to 2.75 percent catapults the Volunteer State into the No. 1 position in terms of state and local sales burden, the foundation analysis found.

Just south of Chattanooga, the burden is far lower. Alabama ranks sixth with a state sales tax of 4 percent and local option taxes of up to 4.64 percent -- a combined rate of up to 8.64 percent.

Georgia came in at No. 23 with a state rate at 4 percent and local options of up to 2.87 percent for a combined rate of 6.87 percent.

Some local jurisdictions in other parts of the country have a higher combined sales tax rate than Tennessee. Tuba City, Ariz., ranks No. 1 nationally with 13.725 percent. That's a combination of Arizona's 6.6 percent state sales tax, a 6 percent local government tax and 1.125 percent county tax, the Tax Foundation analysis found.

While Tennessee's combined sales taxes rank No. 1, its overall average state and local tax burdens rank favorably, according to the Tax Foundation report.

Tennessee residents live in a state that has the 47th lowest overall state and local tax burden -- 7.6 percent or the third lowest nationally -- according to another Tax Foundation report.

Tennessee has no general personal income tax although it does have a 6 percent tax on certain interest and dividend income as well as a 6.5 corporate income tax.

Alabama, which has a general income tax, ranked No. 40 with a combined overall state and local tax rate of 8.5 percent. Georgia, which has a general state income tax, was No. 32 with an overall state and local tax burden of 9.1 percent.

The latest Tax Foundation report largely focused on local sales taxes, saying they "add a significant burden on consumers."

Tennessee local sales taxes average 2.43 percent. The rate in Chattanooga and Hamilton County is 2.25 percent. Forty-four counties are at the maximum 2.75 rate. The lowest county sales tax is in Johnson County -- 1.5 percent.

The Tax Foundation's report is generating debate between advocates of tax reform and a free market-oriented advocacy group.

Tennesseans for Tax Reform spokeswoman Samantha Maples said the report bolsters the group's arguments that Tennessee's overall tax system is unbalanced and unfair.

"We have the highest sales tax in the country, and that's bad because it's a regressive tax," said Maples, whose group supports a state income tax. "It basically burdens those who can least afford it."

She said the state's 5.5 percent sales tax on food is the nation's third highest.

"The tax system really affects those who can least afford it," Maples said, noting the state's median income is less than $40,000. "The people at the higher scale, $100,000 or more, they're getting a nice break here, but anybody below that is not."

She argued the state's relatively low overall tax rates mean fewer services for people at the bottom of the economic ladder, leading to more crime and problems like the state's high infant mortality rate.

Beacon Center of Tennessee Executive Director Justin Owen countered that, saying, "I certainly think it's good that we rely heavily on a sales tax instead of an income tax or other types of taxes."

Dismissing the idea of a general state income tax, Owen said, "first of all, you shouldn't tax people for generating economic growth and wealth and taxing productivity."

A sales tax on consumption is "more even-keeled," he said.

Still, Owen said, officials "may come to some agreement on the sales tax on food. That hits low income and seniors harder. We think we could lower the sales tax on food -- if we cut and are not simply shifting taxation."

Tennessee should look at cutting waste, fraud and abuse, reducing the size of state government or turning some functions over to the private sector, he said.

The study's author, Tax Foundation analyst Scott W. Drenkard, said in an email that "on the topic of consumption taxes versus income taxes, you would be right to say that consumption taxes are favorable because they don't have some of the negative incentive problems associated with taxing income, i.e. people work less because they take less of that income home with them at the end of the day."

"With that said," Drenkard said, "the report ranks the states because people have options of how and where they spend their money. Tennessee is bordered by Kentucky and Virginia, which have combined state and average local rates of 6 and 5 percent, respectively."

Chattanooga businesses long have complained about the state's high sales tax, saying it sends residents down to Georgia to buy groceries, clothing and other items.

Drenkard noted businesses also are affected by sales taxes.

The foundation's State Business Tax Climate Index, which looks at sales taxes as well as corporate rates and other taxes that businesses pay, ranks Tennessee 27th among states. Georgia ranks 25th and Alabama is 28th.

South Dakota ranks No. 1.

about Andy Sher...

Andy Sher is a Nashville-based staff writer covering Tennessee state government and politics for the Times Free Press. A Washington correspondent from 1999-2005 for the Times Free Press, Andy previously headed up state Capitol coverage for The Chattanooga Times, worked as a state Capitol reporter for The Nashville Banner and was a contributor to The Tennessee Journal, among other publications. Andy worked for 17 years at The Chattanooga Times covering police, health care, county government, ...

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TNCitizen said...

It's consumption that drives economic activity in the US. Taxes on consumption like Tennessee's sales tax and excise (tobacco, alcohol and gasoline, etc.) taxes reduce consumer spending and put a drag on our prosperity. Jobs are created by consumer demand that leads businesses to hire more employees.

Where does the money the consumers spend come from? It comes from income. Why not tax it at the source? Even the 91% top marginal federal tax rate of the 1950's did not discourage the top earners from earning more. Removing the sales tax on groceries, lowering the sales tax on other items and replacing the revenue with a broad-based income tax (with generous exemptions and graduated rates from 3% to 7%) will increase the buying power of 75% of Tennesseans and unleash the pent-up demand caused by the Great Recession and lingering shortage of jobs.

September 28, 2011 at 12:28 p.m.
Didedi62 said...

Wake up people, we may pay a higher sales tax but at least we do not have to pay a State Tax. I have lived in states that charge a 7 to 8 percent sales tax and then have a 2 to 4 percent state tax taken out of each paycheck. My husbands check alone would have over $300 a month taken out and I know we do not pay that much a month in sales tax.

September 28, 2011 at 12:46 p.m.
TNCitizen said...

Didedi62 said...

"Wake up people, we may pay a higher sales tax but at least we do not have to pay a State Tax. I have lived in states that charge a 7 to 8 percent sales tax and then have a 2 to 4 percent state tax taken out of each paycheck. My husbands check alone would have over $300 a month taken out and I know we do not pay that much a month in sales tax."

Assuming a 4% tax rate, $300 a month in taxes means the monthly income must be $7,500 or $90,000 a year. If we assumed a 2% tax rate the income would be $180,000. Using data from the Institute on Taxation and Economic Policy's Who Pays? book, on average families at your income level pay between $3,000 and $3,800 a year in Tennessee sales taxes. The proposal I outlined above would reduce your sales taxes between $800 and $1,200 a year. If you have investment income and pay the Hall Income tax, that would be eliminated and replaced with a broad-based income tax that would be between $2,000 (on $90,000 income) and $5,000 (on $180,000 income). Your total state and local tax bill would change from 4.5%-5.5% currently to 5.5%-6.5%, depending on actual income. That compares to 11.7% for those earning under $17,000 a year (averaging $10,000). That means that after paying state and local taxes they would have $8,830 left to live on. You would have between $85,000 and $168,300 left after state and local taxes. Plus you would have a larger deduction on your federal return for the state and local taxes paid. Tell me again what it is you're whining about. Don't you see your prosperity as in great measure the result of the social and economic stability we all provide for ourselves through our state, local and federal governments?

September 28, 2011 at 2:33 p.m.
Salsa said...

This is how it would work in the real world: If we had a state income tax they would just keep the high sales tax and then add on the income tax.

September 28, 2011 at 3:53 p.m.
TNCitizen said...

That would never pass. Tennessee is and will always be a low-tax state. The article cites our rank as 47 out of 50 states. We are at 7.6%, tied with South Dakota. Nevada with all its gambling revenue is at 7.5% and Alaska with its huge oil revenue is at 6.3%

September 28, 2011 at 5:36 p.m.

All taxes reduce consumer spending and put a drag on prosperity. Arguing that one is better than another is foolish. The only way an income tax is different from the sales tax is that the sales tax will affect fewer people. It will only affect those who actually earn an income. Welfare slaves will get even more out of our money. Taking more money from those who earn it doesn't sound like a good incentive to me. A consumption tax is far more fair than any other tax. A national consumption tax would revolutionize taxation in this country and eliminate all the tax loopholes regressives whine so much about. Why are they so against it? Because it is fair.

September 28, 2011 at 6:08 p.m.
TNCitizen said...

FlyingPurpleSheepleEater said...

"All taxes reduce consumer spending and put a drag on prosperity...."

You're ignoring the other side of the equation. Without taxes there can be no revenue to support a government that defends our liberties and creates the stable society and economy that make that prosperity possible. Want to try a society with no taxes? Try Somalia.

Why are you advocating class warfare against "welfare slaves"? The poor are poor because our capitalist economic system redistributes wealth to the top (Read Adam Smith). Employers have created a "slave class" so they can exploit it with low wages. They are prolonging the recession so they can reduce wages further.

Tennessee's reliance on consumption taxes is the reason families in the bottom 20% by income pay 11.7% of their income in state and local taxes while those in the top 20% pay 4.5% of their income. You must have a very warped sense of justice if you think that is fair.

September 28, 2011 at 7:05 p.m.
Humphrey said...

Tn sales tax is very regressive. We would be better off as a state with a combination of reduced sales tax and an income tax.

September 28, 2011 at 7:34 p.m.
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