A nonprofit tax watchdog group says Tennesseans pay the highest combined state and local sales tax rate in the country, with Arkansas, Louisiana, Washington and Oklahoma trailing behind -- but that might be a recipe for economic success.
According to a new report by the nonprofit Tax Foundation, the Volunteer State's combined average 9.44 percent state and local sales tax rate tops the charts. But other foundation reports show Tennessee's actual tax burden ranks third-lowest in the nation -- $2,707 per person in 2010 -- and Tennessee ranks 15th among states for business tax climate.
The state doesn't tax wage income, but it does collect 6 percent of income from interest and dividends above a certain amount-- called the Hall tax.
Scott Drenkard, economist and author of the new report, said Thursday that Tennessee's combination of a high sales tax and selective income tax is "a pretty good policy decision."
"Economists generally find that taxes on consumption are easier on the economy than taxes on income," Drenkard said.
However, opponents such as Tennesseans for Fair Taxation, say sales taxes are regressive, hitting the poorest people the hardest by forcing them to pay out a larger share of their income in taxes. The group has fought unsuccessfully for the state to adopt a general income tax. It also favors abolishing sales tax on food, reducing the sales tax rate and other measures to ease the burden on low-income families, according to its website.
The organization supports sales tax over income tax, but Drenkard said even sales tax systems need to be reformed.
Sales taxes were created in the 1930s in response to the Great Depression, he said. In those days, the bulk of the U.S. economy ran on the sale of goods. That has changed, Drenkard said.
"States are now only levying taxes on goods, which only represent one third of the economy," he said. "Tax reform in the next two decades is going to have to change to include services and lower the total rate."
Services would include lawyer fees, accountant fees and medical services, but taxes would only be included on the final bill, he said.
"It's a thing that people get really emotional about because it's a new tax on something they didn't used to pay a tax on. But you have to do that to bring down the total rate," Drenkard said.
Mark West, president of the Chattanooga Tea Party, says his take-away from the report was Nashville doesn't need any more revenue.
"The initial, driving message of the tea party movement was, 'Taxed enough already.' When we see reports like this, it reaffirms the movement of the tea party," West said. "It's a constant reminder to our leaders that they need to make do with the revenue they have already, instead of always looking for more money."
If anything, West said, the foundation report was an endorsement of a flat national sales tax -- supporters call it the Fair Tax -- in place of the federal income tax.
"Of course it is alarming that we are the highest, when it comes to a certain type of taxes, but it's the type of taxes we've chosen to fund our state government. This is all we need," West said.
Tennessee Gov. Bill Haslam's spokeswoman, Alexia Poe, said Haslam "is proud that Tennessee is a state that is among the lowest in taxes and debt and one of only a handful of states without an income tax."
Contact staff writer Louie Brogdon at 423-757-6481 or at email@example.com.