Tennessee State Capitol

The Tennessee State Capitol in downtown Nashville

Gov. Bill Lee’s tax plan would give Tennessee families three months off from paying taxes on their groceries later this year. But various other changes to how the state taxes businesses, if passed, will create a long-term gap in funding that could be filled by working families' tax dollars. 

Tennessee is one of 13 states with a grocery tax. Because of its lack of a state income tax and increasingly corporation-friendly tax breaks, the state leans heavily on sales tax for revenue — 63 percent of Tennessee's tax revenue comes from the sales tax. The burden of a sales tax typically falls on consumers, disproportionately affecting low-income and middle-class families, and the Tennessee tax structure has long been considered by economists to be one of the most regressive in the country. Between Senate Bill 275/House Bill 323, which will cause a drop in state revenue, and another piece of legislation that would cap fuel taxes for corporations, we could be further regressing. 

“Eliminating the sales tax on groceries for three months is something that's going to help every Tennessee family,” says Tori Venable, state director of conservative advocacy group Americans for Prosperity. “It's a small thing, but it actually has a pretty huge fiscal cost because that is where so many people are paying their taxes, is on groceries.”

While Senate Bill 275 might relieve some of that pressure between August and October, providing an estimated $100 in average tax savings per family, the other two parts of the bill are less predictable in how they could affect Tennesseans. 

“I think we need to watch how this affects the overall share and make sure we’re not making what is already one of the more regressive tax systems in the country more regressive,” said Sen. Jeff Yarbro during Tuesday’s Senate Finance, Ways and Means Committee meeting. The bill passed through that committee unanimously. 

The bill has three main focuses. Aside from the grocery tax, the other two major changes would be made to the franchise and excise tax, which applies to businesses that operate in multiple states, and the business tax. In theory, the franchise and excise tax change would eventually lead to an increase in state revenue after the first few years of it causing decreases. The change is meant to reward businesses that are based in Tennessee with tax cuts, with advocates arguing that the current structure rewards businesses that are based out of state but make sales in Tennessee. 

“As far as I can tell, [those who will pay more in taxes] would be the businesses that perhaps make the most in Tennessee but don't have as much capital or employees in the state,” says Mandy Pellegrin, deputy director at the Sycamore Institute, a nonpartisan public policy research center in Tennessee. “And it will benefit the businesses that have very large physical footprints with lots of employees but maybe fewer sales and revenue in the state.”

Advocates for the legislation estimate that while the state would initially see a decrease in revenue, because it would incentivize businesses to move to Tennessee, it would eventually begin to produce revenue increases. Another part of the bill would give tax credits to companies offering paid leave, but it is unclear whether this will incentivize more companies to provide paid leave, or just give tax breaks to the ones that already do. The final part of the legislation simply provides tax breaks for businesses by raising the threshold on what is taxable. 

“I think the largest beneficiaries of this bill are going to be small business owners, especially where we are raising the exemption cap,” says Venable.

For fiscal year 2023-2024, the Tennessee Department of Revenue estimates these tax breaks will cause a decrease in state revenue of $404 million. $171 million of that is a one-time drop triggered by the grocery tax holiday, while the rest comes from tax breaks for businesses and corporations that will continue to cause a reduction in state revenue for years to come. 

Meanwhile, Senate Bill 626/HB431 would provide tax breaks for FedEx and other corporations that traditionally have helped fund the state’s airports via the jet fuel tax. Over the years, the state legislature has continually lowered the cap on how much a corporation has to pay in jet fuel taxes. FedEx has four lobbyists registered with the Tennessee General Assembly.

“We're not going to get enough jet fuel tax to support airports,” says Pellegrin. “We're going to supplement it with general fund revenues, which are obviously sales tax and franchise and excise taxes.”

In the past this was done through a nonrecurring subsidy, but this legislation would permanently cap the amount that corporations have to pay in jet fuel taxes at $1 million, placing the burden of that gap in funding on the general fund.

The bill passed the Senate Finance, Ways and Means Committee on a 9-2 vote, with Sens. London Lamar (D-Memphis) and Joey Hensley (R-Hohenwald) voting against it. 

“This is just decreasing what these huge corporations pay, which is not even their fair share to maintain airports,” said Hensley during committee. 

Both bills are scheduled to be heard on the Senate floor Tuesday. HB323 already passed on the House floor, and HB431 is on the House Finance, Ways and Means Committee calendar for Tuesday. 

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