Tennesseans will pay more for groceries, starting Wednesday, when the state's three-month suspension of its sales tax on food expires.
Tennessee removed its 6.75% combined state and local sales tax on most grocery items during August, September and October as part of what Gov. Bill Lee pushed as the biggest tax cut in state history.
The Tennessee Works Tax Act adopted earlier this year removed state and local sales tax on most grocery items for one-fourth of the states's current fiscal year and offset the tax losses from the sales tax holidays with budget surpluses accumulated during the pandemic as the state's economy grew and federal aid and sales tax collections boosted state revenues.
The sales tax suspension, which was triple the length of the one-month suspension granted in 2022, saved Tennesseans an estimated $273 million.
"In Tennessee, we cut taxes any chance we get because families should keep more of their own hard-earned dollars," Lee said when he introduced the three-month sales tax exemption on groceries.
In addition to the grocery tax holiday, Tennessee also exempted many school supplies and clothing items during a back-to-school sales tax holiday in late July. That was projected to save Tennessee consumers up to $20 million.
National Federation of Independent Business State Director Jim Brown said the two sales tax holidays in Tennessee gave a much-needed boost to small businesses and their customers.
"Both sales tax holidays come at an important time, giving locally owned stores a timely shot in the arm and their customers a great chance to save money," Brown said in a statement.
Without a state income tax and as one of the lowest per capita tax states in the country, Tennessee can't afford to give up its tax on food altogether, Lee said.
Tennessee is one of only 13 states that impose a state sales tax on food, and it is one of eight with a lower rate on food than other items. Tennessee's tax on groceries is 4%, which is less than the statewide tax rate of 7%. Local governments can add up to 2.75% to the state sales tax rate.
Most states don't impose a sales tax on food, since such taxes tend to be regressive and impose the biggest hardship on poor people who spend a bigger share of their income on groceries.
"Sales taxes worsen income and racial inequalities," Eric Figueroa of the Center for Budget and Policy Priorities said in a study on sales tax rates. "Low-income people pay much more of their income in sales taxes than higher-income people do because they must spend a very large share of their income to meet basic needs. "
Figueroa said those among the bottom 20% of households for income (those making less than $20,800 a year) pay almost eight times more as a share of their incomes in sales taxes than the wealthiest 1% of families (those making more than $553,200).
"The revenue systems in states that rely too heavily on sales taxes thereby create additional barriers for lower-income residents, making it harder for them, for example, to afford daily expenses like gas for their cars or to rent in neighborhoods with more opportunities — which, in turn, may make it more difficult for them to work their way into the middle class," Figueroa said.
At an Oct. 19 speech to the Chattanooga Rotary Club, Lee was asked why Tennessee can't follow the lead of states that have given up their sales tax on groceries.
"We can't do it right now because it is a major part of the revenues of our state," Lee said. "We are the lowest tax per capita state in America. We have very low taxes right now. There are different types of taxes and they affect different people different ways, and we're always looking for the best overall way to create revenue for our state."
Tennessee is one of only nine states that doesn't have any state income tax. A study by the Tax Foundation found Tennessee ranked as the third lowest state in 2022 for per capita taxes behind Alaska and Wyoming. Lee said Tennessee's relatively low tax rate and top bond rating are key reasons the Volunteer State is growing nearly three times as fast as the nation as a whole.
"Honestly, the state General Assembly contemplates every year what is the best way to create revenue stream in this state in a fairer way for businesses and individuals in an environment that is very low tax," Lee told the Chattanooga Rotarians. "It's very important that we have a very low tax rate."
Tennessee is one of 18 states that offered a sales tax holiday this year, using surplus funds to temporarily suspend the tax. The non-partisan Tax Foundation, which studies state and local tax issues, says such tax holidays are "ineffective and inefficient" and tend to reward those able to control when they spend money on the exempted items.
Grocery taxes, which already tend to be regressive since poor people pay a bigger share of their income on such levies, get even more regressive with sales tax holidays since wealthier individuals are able to take more advantage of the short-term tax holidays and buy more food and store up some items when the tax is not in place.
The on-and-off tax on food also requires food retailers to spend time and money to adjust their registers to reflect what items are eligible and when for the tax holiday.
Such tax breaks have proven popular, but the Tax Foundation said the measures don't help the overall economy and can contribute to inequities.
"These are well-intended policies that are popular, but not all well-intended attempts have positive outcomes," Manish Bhatt, a senior policy analyst for the Tax Foundation, said in a telephone interview. "It's a way for people to feel like they are getting some relief, but the ultimate reality is that if you live in a state that has to provide you with a holiday from the sales tax, it is an implicit recognition that the sales tax system is not competitive. It would be far better policy to reduce the sales tax rate year-round, rather than relying on an economically inefficient and ineffective holiday."