As taxpayers prepare to settle up with Uncle Sam over their 2021 federal taxes due by the April 18 filing deadline, Tennesseans can take some solace in a new report showing the Volunteer State has the second-lowest tax burden among the 50 states.
According to a study released Tuesday by the personal finance website WalletHub.com, Tennessee's tax burden for state and local taxes is equal to 5.75% of personal income, or one third less than the U.S. average and less than half the comparable burden in the top-taxing states like New York, Hawaii, Maine and Vermont.
Tennessee is among nine states that don't have a personal income tax and its local property tax burden is the second lowest of all states, equal to 1.71% of income.
Alabama has the lowest average property tax burden of any state at only 1.4%, but Alabama, like Tennessee, has an above-average sales tax rate, WalletHub said.
Tennessee's sales tax rate is among the top 14 states in the country with a combined state and local rate of up to 10% in some jurisdictions. In Chattanooga and Hamilton County, the combined state and sales tax rate is 9.25%.
Although cheaper overall, critics of Tennessee's tax structure contend the relatively high sales tax rate makes taxes in Tennessee regressive by requiring low-income people to pay a bigger share of their income in taxes since they tend to consume more and save less of their overall income.
Proponents of Tennessee's tax system contend that using sales and gas taxes for government revenues is an effective and visible type of user tax paid in relation to the amount consumed and keeping other taxes on property and income low helps promote wealth creation and encourage economic development.
Donald Bruce, associate director of the Boyd Center for Business & Economic Research at the University of Tennessee, said "the jury is out" on whether lower state and local taxes necessarily help economic growth. States with higher tax burdens often spend more on education and infrastructure that can promote growth by giving workers better skills and making a city easier to do business in.
Lowest tax burden states
1. Alaska, 5.06%
2. Tennessee, 5.75%
3. Delaware, 6.22%
4. Wyoming, 6.32%
5. New Hampshire, 6.41%
6. Florida, 6.64%
7. South Dakota, 7.12%
8. Montana, 7.39%
9. Alabama, 7.41%
10. Oklahoma, 7.47%
Source: WalletHub “2022 Tax Burden by State.” Georgia had the 15th lowest tax burden. New York, Hawaii and Maine, in order, have the highest tax burden. The tax burden measures the proportion of total personal income that residents pay toward state and local taxes. WalletHub compared the 50 states across three tax types — property taxes, individual income taxes and sales and excise taxes — to compile its rankings.
"The ability of state taxes to contribute to economic growth depends critically on the use of those funds," Bruce said in the WalletHub report on state and local taxes. "The right balance comes in raising the amount of revenue to provide the desired public services without having a tax burden that is high enough to cause some taxpayers to leave the area."
Tennessee has benefited from an influx of people leaving higher-tax states like California during the pandemic, but Tennessee still suffers from higher rates of poverty and crime and lower rates of educational achievement, according to WalletHub.
Mary L. Heen, a professor of law and tax expert at the University of Richmond, said she believes the income tax " tends to be the most fair tax, using a taxpayer's ability to pay as the measure of fairness.
"Income is closely tied to a person's ability to pay taxes," she said in the WalletHub report. "The burden of sales taxes falls much more heavily on lower-income taxpayers, a result that violates fundamental fairness norms."
Susan Pace Hamill, a professor of law and tax expert at the University of Alabama, said sales taxes also may be more volatile than taxes on property, vehicles or even income.
"During economic downturns, states that are more sales tax reliant will experience far greater instability collecting revenues," she said.
Nonetheless, tax revenues grew for Tennessee during the downturn of the pandemic, in part, because Tennessee began taxing internet sales that were previously untaxed and state coffers were aided by an influx of federal dollars from the American Rescue Plan.
Arthur Laffer, the former chief economist under President Ronald Reagan, relocated from California to Tennessee because of Tennessee's lower tax burden and Laffer has praised Tennessee and other low-tax states for helping reduce the cost of living and doing business.
"You get less of what you tax more," Laffer said in an interview last year after a speech to the Chattanooga Rotary Club.
To promote more income and property wealth for individuals, states and local governments should follow the example of Tennessee and have less tax on income and property, Laffer said.