State revenue falls amid tax holidays, business break

After two years of tax windfalls, Tennessee’s revenue leveled off in August amid sales tax breaks and a one-time business tax cut, all of which are forerunners to permanent business tax reductions that could affect the state budget.

Finance and Administration Commissioner Jim Bryson reported revenues came in at $1.5 billion for August, $39.4 million less than estimated and $1.7 million lower than the same month a year ago. 

Revenue dipped .11%, most of that driven by a decrease in franchise and excise tax collections, according to Bryson. 

Sales taxes were $25.4 million higher than estimated for August. But the state also provided a break on grocery sales taxes and a weekend-long sales tax holiday, much of which was part of a $400 million tax reduction set to include business tax breaks scheduled to kick in next year.

“As anticipated, August revenues were slightly lower than budgeted estimates but were generally level with receipts received in August 2022,” Bryson said in his statement. He didn’t mention the impact of the sales tax reductions.

The grocery break is costing the state about $55 million a month, from August through October, and the sales tax holiday is reducing state and local government revenue by about $178 million, according to a financial analysis of the legislation. The governor’s office, however, placed the impact of the three-month grocery tax break at $288 million early in the year.

The state ran a surplus of more than $2 billion the last two years, but the most recent fiscal year saw the Funding Board raise the revenue growth projection from 2.5% to between 6.8% and 7.7%. The growth rate is now back down to 2.5% on the $56.2 billion state budget for fiscal 2023-24.

Bryson pointed out sales and use taxes continued to show “strong growth,” yet in spite of the sales tax holidays he blamed a $15 million one-time corporate tax refund for some of the sluggish returns, as well as privilege tax collections affected by persistently higher interest rates and their effect on realty transfer and realty mortgage tax collections.

Mortgage rates hit 7.23% in August, the highest in 20 years, according to reports. The inflation rate in July came in at 3.2%.

Responding to questions about the report Wednesday, Senate Democratic Caucus Chair London Lamar said in a statement the latest figures show, “Republican tax breaks for big corporations and wealthy individuals are eroding our tax base and placing nearly the full weight of Tennessee’s budget on working and middle-class families.”

She noted some “billion-dollar companies are paying a lower tax rate than teachers and construction workers” and added, “That’s a problem!”

The tax act passed the Senate 30-2, and Lamar, a Memphis Democrat, and Sen. Charlane Oliver, D-Nashville, were the only two members to vote against it. The bill passed 90-0 in the House. 

In contrast, Sen. Bo Watson, chairman of the Senate finance committee, wasn’t overly concerned about the report.

“The decline in revenues, obviously, I’m not happy to see it. But it’s not totally unexpected either,” said Watson, R-Hixson. “We’ve been anticipating a return to a more normal growth rate.”

Watson pointed out it could be the first time many lawmakers have seen the state fail to meet budget projections. But he added that the estimates remain “pretty conservative,” and budget handlers shifted numerous expenditures to “non-recurring” to create a “safety gap” in case of an economic slowdown.

He acknowledged the sales tax breaks also were expected to make revenues “a little soft.” And despite the looming business tax breaks, he said fiscal leaders are expecting a “normal” growth rate and not the double-digit growth they’ve seen for two years. Watson predicted the business tax cuts could help spur revenues by creating a “business-friendly” atmosphere.

The Tennessee Works Tax Act of 2023, which won’t take effect on most businesses until 2024, provides a host of breaks, primarily a single sales factor on franchise and excise taxes and removal of  property and payroll factors, a $17 million break. It phases in after Dec. 31 and will be in full effect permanently after Dec. 31, 2025.

Other major changes involve an increase in the filing threshold for taxable sales in any county or city to $100,000 from $10,000, a benefit for small businesses and some industries amounting to a $7.9 million tax break, and a small business deduction on the first $50,000 of net income for excise taxes, a $37.8 million break.

Some of the state’s largest businesses also will enjoy a $271.2 million break based on the depreciation of their assets over the next four years.

Watson warned lawmakers about a $330 million “hole in the budget” during the recent special session on public safety.

At that point, sales tax revenues were coming in $2.5 billion more than projected in fiscal 2022-23, which ended June 30. Yet Bryson reported a three-month shortfall because of the increase in the projected growth rate, though he noted the state covered it with excess dollars in department budgets.

Bryson declined to speculate during the special session on whether the state should enact another grocery sales tax break in 2024.