Tennessee’s state sales tax was enacted in 1946 at a rate of 2%. Since then, our economy has changed DRAMATICALLY, such that a sales tax is no longer an effective source of state revenue.
What’s happened since then? Cross border shopping, Internet, and mail order have eroded the tax base by providing a way for people to avoid Tennessee’s high sales tax.
Tennessee, like the rest of the country, has become a more service-based economy (services are not subject to a sales tax). As a result, Tennessee’s tax base has continued to erode. In April 2010, the sales tax revenues declined for the 23rd straight month.
Our legislators’ response? Instead of reducing our dependence on the outdated sales tax, legislators in July 2002 raised the state tax rate from 6% to 7% on all items except some grocery food. On top of this 7% state rate, local governments can add another 2.75%, for a maximum sales tax rate of 9.75%.
Now we have the highest sales tax in the nation and our schools are STILL 49th nationally in funding per capita!
Because Tennessee puts all its eggs in one basket. The state of Tennessee relies on sales & selective taxes for nearly 80% of its revenue.4 One revenue source isn’t enough!
Because each increase in the sales tax rate results in more shoppers leaving the state by car, mail order, and Internet. This means lost jobs for Tennesseans, lost revenue for the state, and less services for the people that live here.
Because 42 other states in the nation balance their lower sales tax with a modest income tax. This gives these states a diverse revenue base to draw upon, providing stable and adequate funding for schools and other public services. It’s time for Tennessee to do the same.