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A new fact sheet released today by nonpartisan think tank ThinkTennessee finds that while Tennessee has one of the lowest overall tax burdens in the nation, its low-income families face a higher effective tax rate than both wealthier families and businesses. The analysis comes on the heels of Tax Day when millions of individual income tax returns are due to be submitted to the federal government.

“Paying taxes is a lot like voting,” said Erin Hafkenschiel, President of ThinkTennessee. “It’s an essential civic duty, and one where our participation is necessary for democracy and society to function. But just like with elections, the tax system needs to be transparent and fair. And if it’s overly burdening poor families while benefiting the wealthy and businesses, like our data shows is the case in Tennessee, it’s time for us to understand why and start a conversation around how we might fix it.”

Using data from The Tax Foundation, Ernst & Young, Economic Policy Institute, and U.S. Census Bureau, among others, ThinkTennessee analyzed tax revenue sources, effective tax rates by income level, and local expenditures in Tennessee. The analysis showed that the state’s tax system relies heavily on regressive taxes, resulting in Tennessee’s poorest households paying the highest proportion of their income in taxes relative to middle- and high-income earners. Furthermore, Tennessee’s tax structure generates comparatively low state and local revenues, leading to less funding available for programs, initiatives, and investments that benefit working families. 

Key findings:

– Tennessee’s tax system relies heavily on regressive taxes. Tennessee is one of only nine states without a broad-based income tax, limiting revenues instead to regressive sources. In 2021, 58% of tax revenues came from sales tax, compared to 42% in the Southeast and 33% nationally. In addition, Tennessee is one of only 13 states with a tax on groceries—its grocery tax rate (4%) is the 6th highest in the nation.

– Tennessee’s taxes are the 3rd most regressive in the nation. The state’s poorest households have a higher effective tax rate (12.8%) than wealthy households (3.8%). Tennessee has one of the highest effective tax rates for low-income households—its 12.8% rate is higher than both the Southeast (11.7%) and the United States as a whole (10.8%)—but one of the lowest effective tax rates for the top 1% of households.

– Tennessee’s businesses pay a lower tax rate but benefit from more spending than in many states. From 2016 to 2019, more than 60% of Tennessee corporations paid no state corporate income tax at all, including 27% of corporations with a reported taxable income over $1 billion. Despite these low business taxes, Tennessee ranks 8th in the “business tax-benefit ratio” which calculates the portion of state spending on programs and services benefiting businesses rather than individuals or families.

– Tennessee ranks 49th in state and local tax revenue per capita – near the very bottom of the nation. Overall, Tennessee collects only $4,259 in tax revenue per resident compared with $4,699 in the Southeast and $6,334 nationwide.

– Tennessee spends less money on programs and services that benefit working families. Tennessee’s overall state and local direct expenditures per capita are $8,062 per resident, lower than both the Southeast ($9,187) and the nation ($11,087). In particular, Tennessee spends less per capita on important services like education, public assistance, health, and public safety than many other states.