Tennesseans may want to load up on groceries before Thursday to avoid paying state and local sales taxes on most food items, which will resume Sept. 1 after a monthlong moratorium.
At the urging of Gov. Bill Lee, the state legislature exempted sales taxes on most foods for the month of August as a way to give back a state budget surplus. Shoppers at grocery stores in Hamilton County have saved the combined 6.25% tax normally imposed on food purchases for the past month, although prepared food, candy, dietary supplements, tobacco and alcoholic drinks have remained subject to the tax.
Statewide, the Tennessee Department of Revenue estimates the tax moratorium has saved Tennesseans $80 million during August. But as of Thursday, the sales tax will be back on grocery items in Tennessee.
Grocers say they are expecting an extra surge in sales Wednesday as shoppers take advantage of the tax-free food purchases before the tax moratorium ends.
"The month of August started out really strong when the sales tax was first removed, and we're expecting a busier-than-normal sales day on Wednesday as people try to take advantage of the tax savings on the final day," Food City President Steve Smith said in a telephone interview Tuesday. "We're going to staff for it and have the products ready for our shoppers."
In April, Tennessee lawmakers approved Lee's $52.8 billion budget, which included a 30-day suspension of the tax on groceries beginning Aug. 1 and ending at 11:59 p.m. on Aug. 31.
"As Americans see their cost-of-living skyrocket amid historic inflation, suspending the grocery tax is the most effective way to provide direct relief to every Tennessean," Lee said in March when he proposed the idea. "Our state has the ability to put dollars back in the pockets of hardworking Tennesseans."
The grocery tax moratorium was in addition to the state's annual back-to-school tax-free weekend, which was conducted at the end of July to exempt most clothing and school supplies from the state's sales tax.
Most states do not impose sales taxes on food items to help limit the regressive nature of such taxes, which tend to take a bigger share of the income of poorer families. According to the Center on Budget and Policy Priorities, 32 states plus the District of Columbia exempt most food purchased for consumption at home from the state sales tax.
Tennessee is among six states that tax groceries at lower rates than other goods. Tennessee cut its sales tax on food to 4% from 5% in 2017.
With extra federal stimulus funds, Tennessee tax revenues grew more than expected during the pandemic, and the Lee administration decided to provide a one-time, monthlong sales tax break on food to let taxpayers keep more of their own money.
"Thanks to the administration's fiscally responsible approach, the state has the ability to provide this tax relief and put dollars in Tennesseans' pockets," Kelly Cortesi, spokeswoman for the Tennessee Department of Revenue, told the Chattanooga Times Free Press on Tuesday.
But Marco Guzman, a state policy analyst at the Institute on Taxation and Economic Policy, said such sales tax holidays are "an ineffective alternative to real sales tax reform." Guzman said by phone that more states offered tax holidays this year using better-than-expected revenues after the pandemic-induced downturn in 2020. Tennessee was the only state to offer a sales tax exemption for food for an entire month.
“Sales taxes are inherently regressive," Guzman said in a new study on sales tax holidays, referring to the fact that lower-income households pay a larger share of their income in sales taxes than wealthier people. "In the long run, sales tax holidays leave a regressive tax system unchanged, and the benefits of these holidays for working families are minimal."
Guzman said wealthier households will load up on food before the tax holiday ends Wednesday, while low-income households that tend to live paycheck to paycheck are not as able to take advantage of such tax timing.
"These holidays are politically popular, but there is not much evidence that they help low-income families that much," he said.
Contact Dave Flessner at dflessner@timesfreepress.com or at 423-757-6340. Follow him on Twitter @dflessner1.