Tennessee business tax reductions put onus on sales tax revenue

After two years of corporate tax breaks, Tennessee saw business revenue plummet in 2024-25, putting more pressure on the state’s sales tax to support the budget.

The legislature reduced franchise and excise taxes dramatically in 2023 and 2024, causing corporate tax collections for the fiscal year ending in July to fall off by 15.8%, a decrease of $721.5 million from the previous year.

In contrast, sales tax collections jumped 4.2%, $596 million, during that time frame, according to recently released state figures. 

Total tax revenues for the year came in nearly 1% higher than projected, $206.5 million, but they were $75.2 million below the previous year’s collections. The state’s budget is $59.8 billion.

Despite the drop-off, Finance and Administration Commissioner Jim Bryson said “the outlook remains strong” since revenue exceeded the state’s estimates. 

Facing dismal returns at mid-year following the corporate tax cut, Tennessee’s funding board reduced growth projections to negative numbers, giving the state a better chance to balance its budget.

Senate Finance Committee Chairman Bo Watson is pleased with the results.

“We have essentially a consumer-based tax system … does it put more pressure on it? It puts pressure for us to be productive and grow our economy for sure and to keep more money in consumers’ pockets so they can spend it, which is why you keep your taxes low in the first place,” said Watson, a Hixson Republican.

Tennessee lawmakers eliminated a portion of the state’s business tax in 2024, a year after making several reductions to the same tax, along with approving a three-year refund, estimated to cost a total of $7.4 billion. The moves came even though Tennessee has one of the nation’s most regressive tax systems, generating more than 60% of $25 billion in revenue from sales taxes. The nonpartisan group, ThinkTennessee, found the state has one of the nation’s lowest tax burdens but that “low-income families face a higher effective tax rate than wealthier families and businesses.”

Lawmakers axed the property portion of the franchise tax in 2024, costing $4 billion over the next decade, and gave a corporate refund totaling $1.55 billion. 

Gov. Bill Lee’s administration pushed the tax reduction and refund last year, claiming it needed to be done because of a potential legal challenge. No companies sued the state, but more than 80 requested refunds when lawmakers debated the issue last year, according to the Department of Revenue. The state wound up giving about 70,000 rebates this spring.

While some lawmakers talked about the consequences of legal challenges over the state’s business taxes, others supported the reduction by saying it was good policy. 

Democrats who criticized the reductions called them a “massive windfall for corporations,” hurting state revenue for schools, roads and public safety.

Democratic Sen. Charlane Oliver and Rep. Aftyn Behn, both of Nashville, sponsored legislation to end the state’s sales tax on groceries, roughly 4%. Their bill, which failed to advance, would offset the loss of revenue by requiring companies that shelter money in offshore accounts to pay their share of taxes.

Oliver issued a statement saying after 15 years of Republican control, Tennessee has one of the highest grocery tax rates in America – and one some of the lowest tax rates on big corporations.

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“That’s not a coincidence. That’s a choice,” she said, adding Lee and Republicans “gave a bailout to big corporations instead of our families. We had a chance to eliminate the state tax on groceries and bring down costs for everyday people, but Republicans chose to reward CEOs and big business instead.”

As a result, Oliver said, people such as nurses, truck drivers and construction workers are paying a higher effective tax rate than their employers.

The legislature approved only a weekend sales tax holiday this year, after giving motorists a break on wheel tags two years ago and an extended sales tax holiday in 2024.

State officials recognized problems with revenue growth in the middle of the last fiscal year, adjusting projections for this fiscal year by setting ranges at negative-1.68% to negative-1.34% for total taxes.

The federal government poured money into states during the COVID pandemic, but those funds are drying up. Simultaneously, the state expects federal funding reductions in the coming year as a result of cutbacks ordered by the Department of Government Efficiency run by Elon Musk at the outset of Trump’s administration.