Tennessee’s temporary tax windfall


Extra tax revenue allowed the state to fund certain projects and the grocery tax holiday

By A.J. Kaufman, Managing Editor

Tennessee’s prodigious increase in state revenues since early 2019 emanated from the state’s ability to collect taxes on internet sales and a tremendous rise in franchise and excise tax collections.

But the days of appreciable revenue growth via taxes could be in the past. That’s because the online sales tax money soon becomes a normal part of the state budget and franchise and excise tax cuts finally go into effect. Excise and franchise taxes are indirect income taxes calculated on specific goods, services and activities.

Tennessee has seen state revenues soar from $17.4 billion to $24.7 billion during the last five years, an annual increase averaging nearly 10%.

Franchise and excise taxes jumped by more than $2 billion between 2019 and 2023; meanwhile, sales taxes have grown by $4.4 billion.

That boon is partially driven by the state being legally permitted to start collecting taxes on internet sales just before COVID-19 arrived on our shores. To wit, as recently as 2018, Tennessee received zilch from online sales taxes, yet by 2023, the state collected nearly $1 billion.

What did this enormous windfall allow the state to do?

Primarily, lawmakers handed out another billion dollars to public schools, offered noteworthy incentives to new businesses and approved major funding to upgrade sports venues.

On the sports side, there is a new 60,000-seat NFL stadium with plans to open in Nashville as soon as 2026, where the state legislature provided a $500 million contribution, with the remaining funds coming from an increase in local tourism taxes; Memphis learned earlier this year that it will receive $350 million from the state in the fiscal year 2024 budget for a renovated football stadium, basketball arena and new soccer stadium.

No new or renovated sports venues are planned for East Tennessee, however.

“I’ve heard from several people who are displeased with the projects going to West and Middle Tennessee, without a major project in our region and I get it,” NETWORKS Sullivan Partnership CEO Clay Walker told the Business Journal. “We have to come together with an ask. It has to be specific, and we must demonstrate the need and, ideally, a strong return on investment. If we can present a project that has a strong regional impact, it would be that much more likely to get favorable consideration. Maybe it isn’t one huge project, but a couple of large projects. I have had some discussions about what would be most impactful in terms of advanced manufacturing and primary job attraction, but as far as I know there hasn’t been a widely accepted concept about the type of project or projects that would get the kind of financial support as the capital expenditures in other parts of the state.”

The funds allowed legislators in Nashville to pass the Tennessee Works Tax Act in April, which included instituting the three-month sales tax holiday on groceries that recently concluded and approve $400 million in tax cuts for families. These were intended in part to ease the impact of inflation.

According to some local reportage, a business tax cut containing a provision allowing companies to deduct a large portion of new capital investments unexpectedly led to a slowdown in franchise and excise taxes that budgeting officials had not foreseen.

Most of the state’s franchise and excise tax collections occur at the end of each fiscal quarter — Sept. 30, Dec. 31, March 31 and June 30. Therefore, the optimal way to understand the rate of incoming revenue since the tax cut is to look at the most recent three-month period.

From July 1 to Sept. 30 of this year, for example, franchise and excise taxes missed projections by around $61 million. By comparison, sales tax exceeded projections by $74 million in the same fiscal quarter, despite no advanced knowledge of how the recent moratorium on food sales tax would affect revenue. Legislation recently was introduced to permanently remove the grocery sales tax.

It seems to all be a fluid situation, and although legislators may have been slightly caught off guard, the Volunteer State topper remains aware.

Tennessee Gov. Bill Lee explained in a late October press conference that Tennessee realized the tax revenues would eventually slow after years of significant growth.

“We just need to be able to predict it appropriately,” Lee told reporters. “We still will have a revenue surplus and have the opportunity to invest in things we need in our state.”

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