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Historical Tennessee tax policy information

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The historical Tennessee tax policy information below is presented as it was written on Ballotpedia in 2015. For more current information regarding tax policy, click here.

Tax policy in Tennessee
Budget Policy Logo on Ballotpedia.png
Tax rates in 2015
Personal income tax:
6% on dividends and interest income only
State sales tax:
7%
Corporate income tax:
6.5%
Tax revenues in 2014
Total tax collections:[1]
$11.806 billion
Tax collections per capita:[1]
$1,803
Rank:[1]
49
Public Policy Logo-one line.png
Total state expenditures • State debt • Tennessee state budget and finances

Tennessee generates the bulk of its tax revenue by levying a general sales tax and select sales taxes (otherwise known as excise taxes).

Tax policy can vary from state to state. States levy taxes to help fund the variety of services provided by state governments. Tax collections comprise approximately 40 percent of the states' total revenues. The rest comes from non-tax sources, such as intergovernmental aid (e.g., federal funds), lottery revenues and fees. The primary types of taxes levied by state governments include personal income tax, general sales tax, excise (or special sales) taxes and corporate income tax.[2]

HIGHLIGHTS
  • In 2014, according to the Federation of Tax Administrators, Tennessee collected $11.806 billion in tax revenues. The state's tax revenues per capita were $1,803, ranking 49th highest in the United States. Notably, Tennessee does not levy a broad-based personal income tax (though the state does tax dividends and interest income).[3][4][5]

    • Tax rates

    Personal income tax

    See also: Personal income tax

    Tennessee utilizes a flat personal income tax rate of 6 percent on dividends and interest income only.[6][7]

    The table below summarizes personal income tax rates for Tennessee and neighboring states in 2015. Numerical rankings are tabulated by excluding states with no personal income tax (as well as New Hampshire and Tennessee, which charge income tax only on dividends and interest) and are based on the highest possible tax rate for which an individual might be liable. Because some states are excluded from the rankings and a few share common uppermost rates, there are 34 numerical rankings, with 1 indicating the highest uppermost rate and 34 indicating the lowest.[6]

    Personal income tax rates, 2015
    State Tax rates Number of brackets Brackets Ranking
    Lowest Highest Lowest Highest
    Tennessee State income tax of 6% on dividends and interest income only
    Alabama 2% 5% 3 $500 $3,001 25
    Arkansas 0.9% 6.9% 6 $4,299 $35,100 13
    Kentucky 2% 6% 6 $3,000 $75,001 18
    Mississippi 3% 5% 3 $5,000 $10,001 25
    Note: For complete notes and annotations, please see the source below.
    Source: Tax Policy Center, "Individual State Income Tax Rates 2000-2015," accessed September 29, 2015

    Personal exemptions

    States that collect a personal income tax allow individuals to claim personal exemptions on income taxes each year. The personal exemption indicates that only a person's income above a certain level is subject to taxation. [8]

    Exemptions work by reducing the amount of an individual's taxable income. Both state and federal taxes allow exemptions. The state exemptions for Tennessee and its neighboring states as reported by the Tax Policy Center are reported in the chart below.[9]

    In Tennessee, state personal exemptions for single filers were equal to $1,250, which was third highest (or third lowest) among its neighbors that allowed for personal income tax exemptions. Exemptions for those filing as a married couple were equal to $2,500 in 2015. Tennessee did not allow individuals to receive exemptions for dependents in 2015.[10]

    Personal exemptions, 2015
    State Single Married Dependents
    Tennessee $1,250 $2,500 $0
    Alabama $1,500 $3,000 $500
    Arkansas (a) $26 $52 $26
    Kentucky $20 $40 $20
    Mississippi $6,000 $12,000 $1,500
    Note: For complete notes and annotations, please see the source below.
    Source: Tax Policy Center, "Individual State Income Tax Rates 2000-2015," accessed September 29, 2015

    Capital gains tax

    See also: Capital gains tax

    A capital gains tax is a tax levied on the profit gleaned from the sale of a capital asset. Examples of capital assets include stocks, businesses, land parcels, homes, personal items and more. Capital gains are taxable at both the federal and state levels. While the federal government taxes capital gains at a lower rate than regular personal income, states usually tax capital gains at the same rates as regular income. Tennessee does not levy a personal income or capital gains tax. The combined uppermost federal and state tax rates totaled 25 percent, ranking 42nd highest in the nation.[11][12][13]

    The table below summarizes uppermost capital gains tax rates for Tennessee and neighboring states in 2015.

    Uppermost capital gains tax rates by state, 2015
    State State uppermost rate Combined uppermost rate Ranking
    Tennessee 0% 25% 42
    Alabama 5% 27.40% 37
    Arkansas 7% 27.90% 29
    Kentucky 6% 28.60% 16
    Mississippi 5% 28% 26
    U.S. AVERAGE 28.70%
    Note: For complete notes and annotations, please see the source below.
    Source: Tax Foundation, "The High Burden of State and Federal Capital Gains Tax Rates," accessed September 29, 2015

    Sales tax

    See also: Sales tax

    Almost all states employ a statewide sales tax, which ranges from 2.9 percent in Colorado to 7.5 percent in California. Additionally, many states allow the levying of local sales taxes, which are then added to the state's tax.

    Tennessee's state sales tax was 7 percent in 2015. The average local tax was about 2.45 percent, meaning that the average combined sales tax was about 9.45 percent. This was the highest combined sales tax in the country in 2015. The table below displays the state tax rates, average local tax rates, and average combined tax rates for Tennessee and its neighboring states.

    Combined sales tax rates, 2015
    State State sales tax Average local sales tax (a) Combined Ranking
    Tennessee 7.00% 2.45% 9.45% 1
    Alabama 4.00% 4.91% 8.91% 3
    Arkansas 6.50% 2.76% 9.26% 2
    Kentucky 6.00% None 6.00% 37
    Mississippi 7.00% 0.07% 7.07% 20
    "(a) City, county, and municipal rates vary. These rates are weighted by population to compute an average local tax rate."
    Source: The Tax Foundation, "State and local sales tax rates, 2015," accessed November 5, 2015

    The sales tax rate in Tennessee for tax year 2015 was 7 percent. The table below summarizes sales tax rates for Tennessee and neighboring states in 2015. The table also notes the state's policy with respect to types of items commonly exempted from sales tax (i.e., food, prescription drugs and nonprescription drugs).[5]

    Sales tax rates, 2015
    State Sales tax rate Exemption status
    Food Prescription drugs Nonprescription drugs
    Tennessee 7% 5% Exempt Taxable
    Alabama 4% Taxable Exempt Taxable
    Arkansas 6.5% 1.5%1 Exempt Taxable
    Kentucky 6% Exempt Exempt Taxable
    Mississippi 7% Taxable Exempt Taxable
    Source: Tax Policy Center, "Sales Tax Rates 2000-2015," accessed September 30, 2015
    1"Food sales subject to local taxes."[5]

    Excise taxes

    See also: Excise taxes

    Excise taxes, also known as selective sales or differential commodity taxes, are levied for the sales of specific goods or services. Excise taxes are considered indirect taxes because they are not charged directly to individuals. In most cases, the excise tax is paid by the producer or seller of an item. The cost of the tax is then included in the sale price of the item and passed on to the consumer. The tables below provide excise tax rates for motor fuel, alcohol and cigarettes in Tennessee and neighboring states. In Tennessee, excise tax revenues comprised 20.2 percent of total tax collections in 2013.[14][15][16][17]

    Fuel excise tax rates, 2015 (in cents per gallon)
    State Gasoline Diesel Gasohol
    Excise tax Other taxes Total tax Excise tax Other taxes Total tax Excise tax Other taxes Total tax
    Tennessee 20¢ 1.4¢ 21.4¢ 17¢ 1.4¢ 18.4¢ 20¢ 1.4¢ 21.4¢
    Alabama 16¢ 2¢ 18¢ 19¢ 0¢ 19¢ 16¢ 2¢ 18¢
    Arkansas 21.5¢ 0.3¢ 21.8¢ 22.5¢ 0.3¢ 22.8¢ 21.5¢ 0.3¢ 21.8¢
    Kentucky 26.2¢ 1.4¢ 27.6¢ 23.2¢ 1.4¢ 24.6¢ 26.2¢ 1.4¢ 27.6¢
    Mississippi 18¢ 0.4¢ 18.4¢ 18¢ 0.4¢ 18.4¢ 18¢ 0.4¢ 18.4¢
    Note: For full annotations, see the source below.
    Source: Tax Policy Center, "State Motor Fuel Tax Rates 2000-2011, 2013-2015," accessed September 30, 2015
    Alcohol excise tax rates, 2015 (in dollars per gallon)
    State Liquor Wine Beer
    Tax rate Does general sales tax apply? Tax rate Does general sales tax apply? Tax rate Does general sales tax apply?
    Tennessee $4.40 Yes $1.21 Yes $1.15 Yes
    Alabama See footnote1 Yes $1.70 Yes $0.53 Yes
    Arkansas $2.50 Yes $0.75 Yes $0.23 Yes
    Kentucky $1.92 Yes $0.50 Yes $0.08 Yes*
    Mississippi See footnote1 Yes $0.35 Yes $0.43 Yes
    1"In 17 states, the government directly controls the sales of distilled spirits. Revenue in these states is generated from various taxes, fees, price mark-ups, and net liquor profits."
    2"General sales tax applies to on-premise sales only."
    3"Rhode Island tax rate scheduled to decrease to $3.75 on July 1, 2015."
    4"Washington privatized liquor sales effective June 1, 2012."
    5"All wine sales are through state stores. Revenue in these states is generated from various taxes, fes, price mark-ups, and net profits."
    Note: For full annotations, see the source below.
    Source: Tax Policy Center, "Alcohol Rates, 2000-2010, 2013-2015," accessed September 30, 2015
    State cigarette taxes, 2015 (in cents per pack)
    State Tax rate National ranking
    Tennessee 62¢ 39
    Alabama 42.5¢ 47
    Arkansas 115¢ 30
    Kentucky 60¢ 40
    Mississippi 68¢ 37
    Note: For full annotations, see the source below.
    Source: Tax Policy Center, "State Cigarette Taxes, 2015," accessed September 30, 2015

    Corporate income tax

    See also: Corporate income tax

    Corporate income tax is the tax levied by a state on a company's profits. In tax year 2015, Tennessee levied a 6.5 percent corporate income tax. The table below lists the corporate income tax rates for Tennessee and neighboring states in 2015.[18][19]

    Corporate income tax rates, 2015
    State Tax rate Brackets Number of brackets
    Lowest Highest
    Tennessee 6.5% Flat rate 1
    Alabama 6.5% Flat rate 1
    Arkansas 1.0 - 6.5% $3,000 $100,000 6
    Kentucky 4 - 6% $50,000 $100,000 3
    Mississippi 3% - 5% $5,000 $10,000 3
    Note: For complete notes and annotations, please see the source below.
    Source: Tax Foundation, "State Corporate Income Tax Rates and Brackets for 2015," accessed October 7, 2015

    Business tax climate

    In October 2014, the Tax Foundation released a report evaluating business tax systems in the states for fiscal year 2015. The report's authors graded the states by analyzing more than 100 variables in five general tax areas: corporate taxes, personal income taxes, sales taxes, unemployment insurance taxes and property taxes. States were scored on a scale of zero to 10, with a score of zero indicating the worst business tax structure and a score of 10 indicating the best. States were then ranked on a scale of one to 50, with a ranking of one indicating the state with the best business tax climate and a score of 50 indicating the state with the worst.[20]

    In fiscal year 2015, Tennessee's business tax climate was ranked 15th in the nation. The table below provides scores and rankings for Tennessee and neighboring states. To access the full report, click here.[20]

    Business tax climate rankings, fiscal year 2015
    State 2014 2015 Change from 2014 to 2015
    Rank Score Rank Score Rank Score
    Tennessee 15 5.52 15 5.48 0 -0.04
    Alabama 25 5.1 28 5.02 -3 -0.08
    Arkansas 37 4.78 39 4.68 -2 -0.1
    Kentucky 24 5.12 26 5.04 -2 -0.08
    Mississippi 17 5.33 18 5.29 -1 -0.04
    Note: For complete notes and annotations, please see the source below.
    Source: Tax Foundation, "2015 State Business Tax Climate Index," October 28, 2014

    Property tax

    See also: Property tax

    Most often, property tax applies to real estate, although some states levy property taxes on other types of personal property, such as automobiles. Generally speaking, an individual's property tax liability is determined by the tax rate and the tax base, which is "determined by both the assessed value of the property and ... the share of the assessed value that is subject to tax." To learn more about property taxes, including tabulation methods, see this page.[21][22][23]

    Property taxes comprise the lion's share of local government revenues. In 2010, property taxes accounted for 75 percent of the tax revenues collected by local government entities (such as cities, counties, school districts, etc.). States, on the other hand, generate very little revenue from property taxes. Property tax rates can vary substantially from locality to locality within a state.[21][22]

    The table below provides the mean amount of property taxes paid, as well as property tax as a mean percentage of home value, for Tennessee and neighboring states for 2012. In terms of mean property taxes paid, Tennessee ranked second highest when compared to neighboring states, nearly matching Kentucky.[21]

    Mean property taxes paid per state, 2012
    State Mean property taxes paid Property tax as a percent of home value
    Tennessee $1,372 0.91%
    Alabama $631 0.46%
    Arkansas $901 0.68%
    Kentucky $1,339 0.92%
    Mississippi $1,004 0.8%
    Source: Tax Policy Center, "Residential Property Taxes in the United States," November 18, 2013

    The table below lists per capita state and local property tax collections for Tennessee and neighboring states for fiscal year 2012. According to the Tax Foundation, which compiled the data below, Tennessee ranked 43rd in the country in terms of property tax collections per capita.[24]

    State and local property tax collections per capita, 2012
    State Collections per capita Ranking
    Tennessee $799 43
    Alabama $531 51
    Arkansas $662 49
    Kentucky $716 47
    Mississippi $870 42
    Source: Tax Foundation, "Facts and Figures 2015: How Does Your State Compare?" accessed October 5, 2015

    Estate and inheritance taxes

    See also: Estate and inheritance taxes

    Estate and inheritance taxes are levied on the property of deceased individuals (decedents). Generally speaking, an estate tax is applied to the value of a decedent's property and is paid from the estate before distribution to any heirs. By contrast, an inheritance tax is paid by the heir or heirs of a decedent's assets.[25][26][27]

    Tennessee is one of 15 states (plus the District of Columbia) that levies an estate tax, though the state is set to phase the tax out by 2016. In addition, Tennessee taxpayers are also liable for the federal estate tax. The table below summarizes the estate tax rates for Tennessee and neighboring states in 2015.[27]

    Estate taxes, 2015
    State Exemption threshold Minimum rate Maximum rate
    Tennessee $5,000,000 5.5% 9.5%
    Alabama N/A
    Arkansas N/A
    Kentucky N/A
    Mississippi N/A
    Note: For complete notes and annotations, please see the source below.
    Source: Tax Foundation, "Facts and Figures 2015: How Does Your State Compare?" accessed October 5, 2015

    Tax revenues

    Tax collections by source as a percentage of total tax collections in 2013.
    See also: Tennessee state budget and finances

    The table below summarizes general fund revenue sources for Tennessee and neighboring states in 2013. All figures are rendered in millions of dollars (for example, $1,500 translates to $1,500,000,000). Per capita figures have not been abbreviated.[28]

    General fund revenue sources, 2013
    State Sales tax Personal income tax Corporate income tax Other taxes and fees Grand total Per capita revenues
    Tennessee $6,643 $126 $1,083 $3,551 $11,403 $1,755.39
    Alabama $1,945 $3,104 $376 $1,889 $7,314 $1,513.12
    Arkansas $2,125 $3,144 $431 $514 $6,214 $2,099.77
    Kentucky $3,022 $3,723 $401 $2,202 $9,348 $2,126.82
    Mississippi $1,887 $1,480 $463 $908 $4,738 $1,583.98
    Source: National Association of State Budget Officers, "State Expenditure Report: Examining Fiscal 2011-2013 State Spending," accessed September 24, 2014

    The table below lists tax collections by source as a percentage of total collections for Tennessee and neighboring states in 2013.[3]

    Tax collections by source as a percentage of total tax collections, 2013
    State Property tax Sales tax Select sales (excise) taxes Personal income tax Corporate income tax Other taxes
    Tennessee 0% 53.6% 20.2% 2.1% 10.2% 13.9%
    Alabama 3.5% 25.2% 25.6% 34.6% 4.1% 7%
    Arkansas 11.9% 33% 13.8% 30.9% 4.7% 5.7%
    Kentucky 5.2% 27.9% 19.3% 34.4% 6% 7.2%
    Mississippi 0.3% 43.1% 18.6% 23.7% 5.6% 8.6%
    Source: Tax Policy Center, "State Tax Collection Shares by Type 2000-2013," June 20, 2014

    See also

    Footnotes

    1. ↑ 1.0 1.1 1.2 Federation of Tax Administrators, "2014 State Tax Revenue," accessed October 26, 2015
    2. ↑ Brunori, D. (2011). State Tax Policy: A Political Perspective. Washington, D.C.: The Urban Institute Press
    3. ↑ 3.0 3.1 Tax Policy Center, "State Tax Collection Shares by Type 2000-2013," June 20, 2014
    4. ↑ Federation of Tax Administrators, "2014 State Tax Revenue," accessed October 26, 2015
    5. ↑ 5.0 5.1 5.2 Tax Policy Center, "Sales Tax Rates 2000-2015," accessed October 2, 2015
    6. ↑ 6.0 6.1 Tax Policy Center, "Individual State Income Tax Rates 2000-2015," accessed September 29, 2015
    7. ↑ Tax Foundation, "State Personal Income Tax Rates and Brackets 2014 Update," March 21, 2014
    8. ↑ Tax Policy Center, "What is the personal exemption?" accessed December 14, 2015
    9. ↑ Internal Revenue Service, "3. Personal Exemptions and Dependents," accessed December 14, 2015
    10. ↑ Tax Policy Center, "What is the personal exemption?" accessed December 14, 2015
    11. ↑ Internal Revenue Service, "Topic 409 - Capital Gains and Losses," August 19, 2014
    12. ↑ Tax Foundation, "The High Burden of State and Federal Capital Gains Tax Rates," February 11, 2014
    13. ↑ Tax Policy Center, "Capital Gains and Dividends: How are capital gains taxed?" June 22, 2011
    14. ↑ Tax Policy Center, "Excise taxes," accessed October 20, 2014
    15. ↑ Investopedia, "Excise Tax," accessed October 20, 2014
    16. ↑ Tax Foundation, "Excise Taxes," accessed October 20, 2014
    17. ↑ Internal Revenue Service, "Excise Tax," accessed October 20, 2014
    18. ↑ Investopedia, "Corporate Tax," accessed September 24, 2014
    19. ↑ Tax Foundation, "State Corporate Income Tax Rates and Brackets for 2015," accessed October 7, 2015
    20. ↑ 20.0 20.1 Tax Foundation, "2015 State Business Tax Climate Index," October 28, 2014
    21. ↑ 21.0 21.1 21.2 Tax Policy Center, "Residential Property Taxes in the United States," November 18, 2013
    22. ↑ 22.0 22.1 Bankrate, "Property taxes explained," February 3, 2000
    23. ↑ Investopedia, "Property Tax," accessed September 26, 2014
    24. ↑ Tax Foundation, "Facts and Figures 2015: How Does Your State Compare?" accessed October 5, 2015
    25. ↑ About.com, "What's the Difference Between an Estate Tax and an Inheritance Tax?" accessed October 16, 2014
    26. ↑ Internal Revenue Service, "Estate Tax," updated September 29, 2014
    27. ↑ 27.0 27.1 Tax Foundation, "Facts and Figures, 2015," accessed October 6, 2015
    28. ↑ National Association of State Budget Officers, "State Expenditure Report: Examining Fiscal 2011-2013 State Spending," accessed September 24, 2014
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