Lawmakers passed a $5.6 billion tax break earlier this year.
Image: Members of the Tennessee Senate on Aug. 24, 2023. Image Credit: John Partipilo
By Sam Stockard [The Tennessee Lookout -CC BY-NC-ND 4.0] –
Buoyed by sales tax collections, Tennessee’s revenue rebounded in August after a year of poor performance marked by weak business tax collections that continued their decline.
Revenues for the month reached $1.5 billion, some $1.3 million more than estimated and $36.3 million more than in August 2023. Yet corporate taxes fell 32.5% below estimates, coming in $19.3 million less than expected as the state experienced the first month of a major business tax break enacted earlier this year eliminating the property portion of the franchise and excise taxes.
A separate report from the state’s Fiscal Review Committee shows franchise and excise tax collections started the year $11 million below last year’s revenue.
On the heels of a separate business tax break approved in 2023, Republican Gov. Bill Lee urged lawmakers to pass another reduction, $400 million annually, in the franchise and excise tax based on the claim that some businesses were threatening to sue the state.
Democrat state Sen. Jeff Yarbro of Nashville, a member of the Senate Finance Committee, called the tax cut “an irresponsible change” in Tennessee’s tax policy, one that causes uncertainty and places too much burden on the sales tax. A “neutral” adjustment would have put the state in a stronger position, he said.
Many experts consider the sales tax “regressive” because it requires people toward the lower end of the economic scale to pay a greater percentage of their income in taxes.
The property tax break also provided a large number of out-of-state companies with a mechanism to avoid paying a large percentage of their taxes in Tennessee, a move Yarbro termed as “short-term thinking.”
“One of the upsides of the property tax valuation is that companies can’t pretend to have property in another state when they clearly own property in Tennessee,” Yarbro said.
Republican Sen. Bo Watson, chairman of the Senate finance committee, appeared more comfortable with the state’s position, pointing out revenue adjustments didn’t lead to any “significant reductions” in budget expenses.
“We think that the budgeted numbers, revenues as adjusted, are more in line with what’s really happening in the economy,” Watson said.
In the revenue report released last week, Finance and Administration Commissioner Jim Bryson noted sales tax receipts reflect “resilient consumer activity” while corporate tax collections dropped because of the 2024 franchise tax break.
“We are cautiously optimistic at the start of the new fiscal year, and we will continue to carefully monitor economic activity and consumer demand to ensure we meet our monthly budgeted estimates,” Bryson said in a statement.
Compared to the same time frame last year, sales taxes increased $37.8 million, up 3.19%, while corporate tax collected fell $11.8 million, down 22.67%.
The August report shows positive movement after a year of feeble tax revenues, caused mainly by the business tax break passed in 2023.
The state’s Fiscal Review Committee reported total end-of-year collections fell short of the original fiscal 2023-24 budget estimate by $593 million and that a total reduction of $794 million was recognized for the year. It marked a $718 million miss in the general fund budget on the original growth estimate.
Last November, in the midst of the fiscal year, the state’s Funding Board dealt with the shortfall by adjusting its 2.25 growth projection to zero when it saw revenues were flagging. The state closed that gap with money from savings and $2.6 billion in recurring revenue that had been put toward one-time expenses.
Despite those weak revenues and the required adjustment, Gov. Bill Lee proposed a massive business tax break expected to cost $4 billion in revenue over the next 10 years, including a $1.55 billion refund for the past three years. It came on the heels of a $1.87 billion cut over 10 years, passed into law in 2023.
The Lee administration introduced the plan in early 2024, saying it was needed because of the threat of legal action. Some Republican lawmakers, though, pointed out no lawsuit was filed against the state and simply claimed the tax cut was good policy.
But while Watson contended the state was going to have to cut the franchise and excise tax because of the likelihood of a legal challenge, Yarbro isn’t convinced Tennessee would have been sued, mainly because no lawsuit was ever filed.
The potential for a legal challenge was unveiled by Department of Revenue officials and came through the Attorney General’s Office.
State leaders are set to travel to New York City this fall to meet with bond rating companies. Watson expects the state to maintain a high rating, which is used as the basis for borrowing money and meeting financial commitments. S&P Global and Moody’s gives the state a AAA bond rating,
Yet the finance committee chairman said he is interested in finding out how the credit rating companies will receive the state’s business property tax reduction.
Yarbro pointed out that Watson acknowledged the ratings agencies have expressed “concerns” about Tennessee’s tax policy changes.
He noted that “reliance on one source of revenue” is risky because it makes the revenue system “more rigid and vulnerable to economic disruptions.”