Tennessee sales taxes called highest in U.S.

Tennessee sales taxes called highest in U.S.

February 15th, 2012 by Dave Flessner in Business Around the Region


The states with the highest average combined state and local sales tax rates are:

1. Tennessee, 9.45 percent

2. Arizona, 9.12 percent

3. Louisiana, 8.85 percent

4. Washington, 8.8 percent

5. Oklahoma, 8.66 percent

Source: Tax Foundation

Tennessee has the highest combined state and local sales tax rate of any state, the Tax Foundation said Tuesday.

The 7 percent state sales tax rate in Tennessee, combined with an average 2.45 percent local sales tax rate across the state, boosts the average tax levy in the Volunteer State to $9.45 for every $100 of purchases.

Critics of Tennessee's sales tax-dependent system complain that the relatively high sales rate puts retailers in border towns such as Chattanooga at a competitive disadvantage and disproportionately hurts the poor who spend more of their income on purchases.

But supporters of Tennessee's tax system insist it is better to tax consumption than income.

"While we would love to see all taxes lower, the sales tax is a stable source of revenue for the state and is paid by nearly everyone," said Justin Owen, president of the conservative think tank, the Beacon Center of Tennessee in Nashville.

"We're fortunate not to have a tax on earned income because states that rely more upon the income tax generally aren't growing as much and lose a lot more revenue when the economy turns sour," he said.

Tennessee is among nine states that do not impose a tax on payroll income, although the Volunteer State does tax some dividend and interest income and capital gains.

Other states without a broad income tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas and Washington.

According to the Tax Foundation, five states do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon.

"Retail sales taxes are a transparent way to collect tax revenue," said Scott Drenkard, an economist for the Tax Foundation. "While graduated income tax rates and brackets are complex and confusing to many taxpayers, the sales tax is easier to understand. People can reach into their pocket and see the rate printed on a receipt."

Drenkard said more than 46 percent of state and local taxes in Tennessee come from sales taxes, double the U.S. average of 22.9 percent.

Elizabeth Wright, executive director of Tennesseans for Fair Taxation, said Tennessee's heavy reliance upon the sales tax makes the state one of the most regressive of any state.

"Lower income people have to spend a higher share of their income on purchases so they end up paying a bigger share of their limited income on taxes in Tennessee than do wealthier families who can better afford to pay more," she said. "Our state needs to diversify its tax sources to make it fairer and to help prevent shoppers from going across the border to neighboring states to buy their goods where taxes are lower."

Tennessee Gov. Bill Haslam is proposing to lower the state sales tax on food from 5.5 percent to 5 percent over the next three years.

"Every little bit will help, but we feel it doesn't go far enough," Wright said.