Tennessee consumers pay the second highest tax of any state in the country on what they buy, but Gov. Bill Lee wants to provide a bit more tax relief this year, at least for grocery shoppers.
A new study by the Tax Foundation said the combined average state and local tax rate in Tennessee of 9.548% is second only to Louisiana's 9.55% average and, unlike 37 other states that exempt grocery purchases from their sales tax, Tennessee still imposes a 4% state levy on all food purchases, which combined with local taxes in Hamilton County results in a 6.25% tax rate in Chattanooga on most food items.
But after giving consumers a one-month reprieve on grocery sales taxes last year with proceeds from the Covid-19 pandemic relief aid for the state, Lee is proposing to extend the sales tax holiday on food to three months in the state's next fiscal year.
"Decades of smart fiscal stewardship have enabled us to weather the national economic storms and do so while maintaining a healthy savings account and cutting taxes for Tennesseans," Lee said in his State of the State speech last week. "So, this year, we're cutting taxes again."
Last August, Tennessee used its budget surplus from pandemic relief aid and other revenues to remove the sales tax on grocery items for 30 days. The sales tax moratorium was the longest of any state last year and saved consumers an estimated $80 million in sales taxes they would have otherwise paid on food items during that month, according to the Tennesee Department of Revenue.
Lee's budget proposal for fiscal 2024 includes $288.3 million for a grocery tax suspension from Aug. through Oct.31.
Lee said the tax moratorium was designed "to provide relief amid nationwide inflation" and with a budget surplus again this year, the governor wants to expand the sales tax exemption period.
"We should do that again this year, but let's extend it to three consecutive months," Lee said Monday night in an address to the Tennesse General Assembly.
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.
Curbing grocery taxes is designed to help low- and moderate-income families who spend a bigger share of their income on food, especially those with larger families. Removing the grocery tax is designed to be progressive so that higher earners pay a higher rate of sales tax. But many low-income families rely on benefits like the Supplemental Nutrition Assistance Program, or SNAP, to pay for food.
Eli Byerly-Duke, a state policy analyst for the Institute On Taxation and Economic Policy (ITEP), said removing groceries from the state and local sales tax "is a worthwhile goal.
"Sales taxes -- especially on groceries -- inherently ask more of families with modest means, so this proposal could help Tennesseans struggling to make ends meet," Byerly-Duke said in an emailed statement last week in response to Lee's proposal. "But the measure is both temporary and untargeted. A better way to permanently support families would be to provide a refundable credit that offsets regressive sales, property, and excise taxes paid."
The Institute on Taxation and Economic Policy favors a progressive income tax that taxes income, rather than consumption, to shift the tax burden more to wealthier individuals and reduce taxes paid by low and moderate-income families,
"Regardless of how much Tennessee tinkers with its sales tax until the state has a graduated income tax it will continue to fund its operations without asking its highest earners to pay even an equal share," Byerly-Duke said.
Tennessee is one of only eight states that do not have a state income tax.
"Sales taxes are just one part of an overall tax structure and should be considered in context," Janelle Fritts, a policy analyst at the Tax Foundation, said in the new report on state tax rates. "Tennessee has high sales taxes but no income tax, whereas Oregon has no sales tax but high income taxes. While many factors influence business location and investment decisions, sales taxes are something within policymakers' control that can have immediate impacts."
Highest sales tax states
The states with the highest average combined state and local sales tax rates are:
1. Louisiana, 9.55%
2. Tennessee, 9.548%
3. Arkansas, 9.46%
4. Alabama, 9.45%
5. Oklahoma, 8.98%
Source: Tax Foundation, January 2023. Georgia’s average combined state and local tax rate is 7.4%. Alaska has the lowest combined rates at 1.76%.
Contact Dave Flessner at firstname.lastname@example.org or 423-757-6340.