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From Governing’s
There is one reason for this odd situation: taxes. Tennessee’s sales tax rate is among the nation’s highest, at 7 percent, and that’s without local add-ons. There are counties where the combined rate is approaching an astronomical 10 percent. Food is taxed one point lower than other commodities, but even the rate on food is more than twice as high as it is in Virginia. If you lived near the border, you’d drive across to shop, too. About 50 percent of Tennessee’s population lives near one of the eight states that border it, and no one is really sure just how many Tennesseans are driving out of state to buy televisions, cameras, food and clothes, or how much it costs the Tennessee treasury every year. But it creates a gaping hole in state finances.
You’d think that, given this hemorrhage of revenue, Tennessee would be in a hurry to get its sales taxes down. But there’s something the state seems to fear more than high sales taxes, and that’s any kind of a broad-based income tax — which is probably the only realistic way to deal with the sales tax problem. The legislature rejected an income tax last year; supporters were heavily targeted for opposition in the November election, and virtually no politician who wants to stay in office is suggesting one right now. In order to close the current gap, the state cobbled together $933 million in other kinds of tax increases, including — believe it or not — a 1 percent increase in the sales tax. “I think the income tax issue is off the table for the foreseeable future,” says Professor Bill Fox, a tax specialist at the University of Tennessee. “I’d say that’s five years.” During those five years, however, Tennessee’s government still must find a way to balance its books. If revenues from last year’s changes should fall short of forecasts, or if the national economy should go into further decline, the state will be in serious trouble. Even if all goes as predicted, there are serious concerns about providing for some of the state’s most crucial functions, especially education. Tennessee’s per-pupil spending for grades K-12 dropped to 46th in the nation last year. Says Fox, “The things you can’t avoid, like a justice system and corrections, will get their share, and education will be crowded out.” Even legislators who voted against the income tax concede that last year’s patchwork solution won’t keep the state running forever. “This one is good for one year or two years,” says state Senator Douglas Henry. “Then, after that, we’ll have to do something else.” Tennessee does tax more services than many states do, but it has also laced the tax code with exemptions. One recent estimate was that the exemptions would cost as much as $2 billion for FY2002-03. Some of the exemptions make reasonable economic sense — you can hardly blame the home state of FedEx for making it advantageous for that company to buy aircraft — but others are harder to justify. And because Tennessee is so heavily reliant on its sales tax, a large portion of the burden is placed squarely on those least able to pay. The men and women who face the unenviable task of administering Tennessee’s tax system are, by most accounts, doing a good job — or at least as good a job as they can. “Their effectiveness has been limited by resource levels,” says Ross Loder, deputy director of the Tennessee Municipal League. “I’ve watched as their requests for additional employees for specific projects and general staff have been turned down over the last three years or so.” The resource shortage — a problem shared by many states — has become additionally troublesome as the system has grown more complex. Some parts of Tennessee now tax certain big-ticket items, such as automobiles and electronic equipment, at three different rates: 9.25 percent on the first $1,600, 9.75 percent on the next $1,600, and 7 percent above that. All of these differences make the system harder for taxpayers to cope with, and harder for an already-overstrained Revenue Department to process. The biggest problem may be trying to collect sales taxes on items bought outside the state that are brought into Tennessee. This is all but impossible for routine purchases — at least short of putting up a kind of Berlin Wall, where people would have to drive through a checkpoint to get into the state. But Tennessee is even having trouble collecting sales tax on automobiles, which shouldn’t be too difficult because each one sold carries registration data in the state of purchase. As one high-level state employee said, with assurances she wouldn’t be quoted by name: “I’m about to buy a new car in Kentucky. I’ll save about $2,400 in taxes. And though I feel a little twinge of guilt, there’s no way they’ll ever catch me.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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ristol, Tennessee, is the widely recognized birthplace of country music. Its 25,000 residents enjoy incredible mountain views, clear lakes and plentiful parks. The one thing it’s not is a good place to shop. When the time comes to buy groceries, many residents make their purchases on the other side of State Street, in Bristol’s sister city, Bristol, Virginia. One Virginia supermarket even has its parking lot in Tennessee.