Changes to Tennessee’s tax laws are coming, as lawmakers work on their proposed bills for the 2024 Tennessee legislative session, which started Jan. 9.
Lawmakers on both sides of the aisle are proposing tax breaks for consumers, with Republicans proposing a tax holiday on diapers and formula, while Democrats would like to see Tennessee’s grocery tax fully repealed.
Gov. Bill Lee is backing a proposal to restructure the state franchise tax to give businesses tax relief. He has said his administration has no plans to propose a food tax holiday this year, as he has done for the past several years.
The Tennessean will update this story periodically as new tax-related bills are introduced and work their way through the legislative process.
Here are a few of the latest tax proposals lawmakers are making this year:
Diapers, formula sales tax holiday
SB 1755, would institute a year-long sales tax holiday on baby diapers, wipes and formula. The proposed holiday would begin July 1 and last through the end of June 2025.
Tennessee is one of only 26 states that charges sales tax on diapers, and the state’s 7% sales tax rate on diapers is one of the highest rates in the nation.
Sen. Adam Lowe, R-Calhoun, a father of four who’s sponsoring this bill with Rep. Greg Martin, R-Hixson, proposed a similar idea last year, which was projected to cost the state $16.7 million in revenue.
That bill got stuck behind the budget, and was ultimately tabled with other spending bills as lawmakers ended the session abruptly after the deadly Covenant School shooting left six dead, and Gov. Bill Lee called for emergency protective order law to keep guns out of the hands of dangerous people.
Gun sales tax to fund school mental health
HB 1590 would create a mental health account to fund school counselors, therapists, and after school programs – funded by tax revenue collected on firearms, ammunition, and accessories.
The bill is sponsored by Rep. Justin Pearson, D-Memphis, who gained national attention last year as he was expelled following a gun control protest that interrupted House proceedings. Most of his legislative proposals are for restrictions or requirements around gun ownership and use.
Pearson has yet to sign a Senate sponsor for HB 1590.
Cash purchases under $500 exempt from sales tax
SB 1734 would make any cash sale under $500 exempt from sales tax, if paid for with cash, coins, gold or silver.
“Cash sales have plummeted over the last decade, and now many people rely almost entirely on cashless payments and digital currency. This is a problem,” said bill sponsor Sen. Frank Niceley, R-Strawberry Plains. “Even in an era of advanced technology and digital banking, it is important to maintain our cash system to protect our economy and Tennesseans’ livelihoods.”
Niceley’s goal is to incentivize consumers and businesses to increase the use of cash to give low-income residents a break, and protect against federal implementation of a central bank digital currency. Niceley is also sponsoring a bill, SB 1764, that would specifically exclude central bank digital currency from the state’s legal definition of money.
With state revenues down, he said the state may not be able to afford his proposal this year. But, Niceley said, he is open to lowering the purchase amount to $100 “to make it more affordable and give it a better chance of passing.”
As of Jan. 18, Niceley does not have a House sponsor for either bill.
Eliminating the 4% grocery sales tax
Freshman Rep. Aftyn Behn, D-Nashville, plans to propose legislation this year with Sen. Charlane Oliver, D-Nashville, to abolish Tennessee’s grocery sales tax and require corporations who do business in Tennessee to pay taxes based on worldwide combined reporting, aggregating profits and losses of all affiliated entities worldwide and paying taxes based on a Tennessee-specific share.
“We have a glaring imbalance in our tax system in the state of Tennessee,” Behn said when announcing her bill. “While working-class families struggle to make ends meet, significant mega-corporations like FedEx and Amazon, through loopholes in offshore tax dodging, don’t pay what they owe in taxes – all the while making record profits in the state of Tennessee.”
Tennessee is one of 13 states that still levies sales tax on food and groceries, and our grocery tax rate is one of the highest in the country at 4%. Combined with local option sales tax, consumers often pay more than 6.75% in taxes on essentials like bread and milk.
Democrats in the state legislature have perennially proposed reducing the state’s grocery sales tax, but the idea has not gained support among Republicans.
As of Jan. 18, Behn had not yet formally introduced her legislation.
The end of the Professional Privilege Tax?
Several bills are still in play from last year seeking to phase out or pare down the state’s Professional Privilege Tax, the annual $400 tax due each year for individuals licensed and registered to practice as attorneys, securities agents, broker-dealers, investment advisers, and lobbyists.
Professions required to pay the tax have been reduced in recent years, and several lawmakers are seeking to reduce or eliminate the tax entirely.
SB 705, sponsored by Sen. John Stevens, R-Huntingdon, and Rep. Mark Cochran, R-Englewood, would repeal the tax entirely after June 1, 2024. Another proposal, HB 585 by Rep. Ron Gant, R-Piperton, and Sen. Bill Powers, R-Clarksville, would phase out the tax gradually by 2026. Powers and Gant have yet another bill, SB640/HB586, to end the tax just for attorneys.
If the tax isn’t eliminated entirely this year, older professionals may get another privilege: HB 1636 would allow anyone 65 or older to pay the privilege tax by mail instead of electronically, for a small fee.
Auto sales tax to fund road projects
SB 1581 would allocate sales tax revenue from new and used cars and tires to the state highway fund, to be used for road projects.
Roads in Tennessee are primarily funded by the state gas and diesel fuel tax, and federal funding. If adopted, the bill would provide another revenue stream for road projects. Tennessee has a $26 billion backlog of unfunded road projects, according to the Tennessee Department of Transportation – a fraction of which was addressed in Lee’s Transportation Modernization Act last year.
The bill is sponsored by Sen. Mark Pody, R-Lebanon.
Statewide cap on property tax hikes
HB 565 would institute a statewide limit on how much local governments can increase property taxes without a public referendum.
Tennessee is one of only five states that do not have a limit on local property tax increases, according to the Tax Foundation.
Rep. Chris Todd, R-Madison County, and Sen. John Stevens, R-Huntingdon, are sponsoring a bill that would require local governments to seek authorization by voter referendum if they wish to raise property taxes by more than 2% plus the cost of inflation.
The conservative think tank Beacon Center of Tennessee is supporting the legislation. A Beacon Poll recently found that 74% of Tennessee voters support the state government having some level of involvement in local property tax increases, and 67% support a cap on property tax hikes, if they require approval by voters in a referendum.
Franchise tax changes
Lee will back legislation to change how businesses calculate franchise taxes due to the state, which will “in effect give tax relief to businesses that are invested in our state.”
Corporations, limited partnerships and LLCs registered in Tennessee or doing business here are currently taxed either based on 0.25% of the net worth of the corporation, or based on the tangible property in which they operate.
On the advice of tax analysts at the state Attorney General’s Office and Tennessee Department of Revenue, Lee’s proposal would eliminate the property measure to calculate the franchise tax, and offer an open refund period to refund businesses who have paid based on property tax in recent years.
“Tennessee is well prepared to address this issue even in a slow-growth year,” Finance and Administration Commissioner Jim Bryson recently told the Senate Finance Committee.
Bryson said that the state has “responded well” to extraordinary growth over the last three years, by “spending wisely, growing our reserves, and paying down our debt.” While tax revenue is now slowing down, the state “is well prepared,” Bryson said.
Specific legislation has not yet been filed.
Vivian Jones covers state politics and government for The Tennessean. Reach her at vjones@tennessean.com.
