Taxing Matters

The over-reliance on sales tax for state revenue in Tennessee has created a budget crisis as its border-town residents increasingly shop in neighboring states with lower sales tax rates.

The absence of income tax in Tennessee has attracted a lot of families to relocate here. This point was a large factor for my family when we moved to Memphis. Arkansas and Mississippi, states with income tax, were both options within easy commute time for this area.

Without an income tax, Tennessee has a higher sales tax to make up for the lost tax revenue. But almost half Tennessee’s population is located within short driving distance to other states with lower sales tax rates. Memphis, Chattanooga, and the Tri-Cities are notable examples of state-border urban areas. Therefore, living in Tennessee for these populations is cheaper twice over as they do not have to pay income tax and can avoid the sales tax hike with shopping in surrounding states. Furthermore, online shopping makes it possible to avoid paying sales tax altogether.

Even if sales tax could have made up for the tax revenue lost from income tax, sales tax still places an unfair burden on those with lower income. Since higher income families typically spend only a portion of their total income and more likely to shop out of state, sales tax represents a smaller total percentage of their income as the income level rises. In economic terms, sales tax is regressive on income.

Therefore, the higher one’s salary the better Tennessee looks as a home state. Sounds good, but it really isn’t. With so much sales tax leakage, Tennessee’s no-income-tax policy could only leave the state in a hole that only continues to get deeper.