NewsTracker Tax and Budget

TN Sales Tax High, Overall Burden Low

Tennessee has the highest combined sales tax rate in the nation, a new study by the Tax Foundation shows, even as the state’s overall tax burden remains low.

Tennessee’s rate of 9.47 percent, a weighted average that takes into account the 7-cent state levy and local rates as high as 2.75 percent, garnered the state the dubious honor of first place. Arizona, with a rate of 9.12 percent, and Louisiana, at 8.86 percent, came in second and third, respectively.

But the payout at the cash register is but one piece when looking at the whole pie.

The Tax Foundation has consistently found that Tennessee has one of the lowest tax burdens of the states, a measure of what portion of residents’ income goes toward state and local taxes. On that measure, Tennessee tied with South Dakota at 7.6 percent, according to the foundation’s latest survey using 2009 data. Only two states, Alaska, at 6.3 percent, and Nevada, at 7.5 percent, had lower tax burdens. The national average is 9.8 percent.

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Tennessee, which has one of the highest combined state-and-local sales tax rates in the country, also has the lowest overall tax burden, according to a report released recently by one of the nation’s oldest organizations that tracks such data.

The Washington, D.C.-based Tax Foundation releases its Tax Freedom Day report each year. The study calculates how many days into the year all Americans would have to work if they were forced to work every day — with no weekends or holidays off — until they fulfilled the year’s tax burdens their elected officials have shouldered them with. This year’s U.S. Tax Freedom date is April 17, but Tennesseans fulfilled their theoretical tax obligation work-load on March 31, making the state the earliest in the country this year.

The Foundation calculates the freedom date by “dividing the official government tally of all taxes collected in each year by the official government tally of all income earned in each year,” according to its website.

“Tennessee is a very low tax state overall, and though it has the highest sales tax, it has no individual income tax,”said  Will McBride, author of the Tax Foundation study.

McBride added that the group lumps state sales and property taxes together, and that when taken together, the state ranks below average in tax burden. “The main reason is that the federal personal income tax is the largest tax burden and that’s driven by average income,” he said. “And Tennessee is a below average income state, as are many of the surrounding states.”

The Tennessee Senate’s Republican and Democratic leaders were both circumspect when TNReport asked for their views on the state’s No. 1 ranking.

“It’s a good thing,” said Sen. Mark Norris, R-Collierville. “But we need to keep it all in perspective. It’s compared to other states, and some states are mighty bad. I’m glad we’re on the better end of that scale, and we want to keep us that way.”

The state has to be mindful of the fact that there will be several bills coming through in the future that cost money, and lawmakers need to manage the budget to live within the state’s means but still be able to meet those needs, Norris said.

“What it does mean is we provide minimal government services, and we are dependent on the private sector to direct the government in more of a way where there’s more government spending,” said Memphis Democrat Jim Kyle, the Senate minority leader. “We have fewer social programs, we depend more on charity.

“But we’re also one of the highest-rated states with a percentage of people who are charitable givers. It just shows that Tennesseans are more self-reliant, and seem to be pleased with that,” he said.

The flip side is that people who for example are mentally or physically disabled or have children with special needs don’t get the taxpayer-financed assistance that may be available in higher-tax states, Kyle said.

The fact that it took the state a shorter period of time to pay the taxes that were owed is a good sign for Tennessee, said Rep. Charles Sargent, R-Franklin, chairman of the House Finance Committee.

“Next year, I think we’ll be two or three days earlier than we were this year, with lowering taxes,” Sargent said.

Press Releases

Group Says Enacting State Income Tax Would Reduce TN Sales Tax

Statement by John G. Stewart, Chair, Tennesseans for Fair Taxation, on the Tax Foundation’s Report on State Tax Rates, Aug. 23, 2010:

The Tax Foundation is correct in pointing out that Tennessee has the highest combined state and average local sales tax rate in the country. This means that lower income families pay a far higher percentage of their income to the state than do higher income families—about 12% for lower income families compared to about 3% for higher income families. This is grossly unfair and destructive to most Tennessee families.

What can we do about it? Tennesseans for Fair Taxation has for many years advocated cutting our sales tax in half and eliminating the food tax entirely. We also propose enacting an income tax with generous exemptions, such that a family of four earning $45,000 would be totally exempt. This approach evens out the tax burden for all Tennesseans, plus it gives about 70% of Tennesseans a tax cut from what they are currently paying to the state.

Our approach would also generate about $1 billion of additional revenue so that crippling budget cuts in education, economic development, public safety, child support, and environment can be avoided.

If ever there was a win—win—win proposal, this is it.

“Washington, DC, August 19, 2010 – Tennessee has the highest combined state and average local sales tax rate of 9.44%, and the Alabama cities of Birmingham and Montgomery are tied for the highest combined state, county and city sales tax rates among major metropolitan areas at 10%, according to two new Tax Foundation reports on state and local sales taxes.”