Why Tennessee’s Regressive Tax Code is a Major Source of Socioeconomic Inequality


Aditya Gokhale

With much of the current political discussion at the national level being centered around income tax reform amidst the recently passed Republican plan, it is useful to examine how Tennessee has fared running a government with one of the most regressive income tax codes in America.

The federal and most state governments have established a system that utilizes a progressive income tax, meaning that individuals that earn more are required to pay a higher proportion of their income to the government. This structure was organized to support low-income individuals by reducing their financial burden while still collecting enough revenue to implement programs that provide them resources they may not be able to afford, including necessities such as food and housing. It has become increasingly important as a means of combating the trend of growing wealth inequality over the past several decades that has restricted access to these basic resources for many Americans.

In 2016, Tennessee moved to join seven other states that have eliminated all forms of an income tax. While the state did not previously impose a tax on wages and salaries, it collected the Hall Tax, a 6% tax on dividend and interest income. The state legislature has now passed a bill that representatives claim will considerably raise after tax income for all residents. The measure will phase out the Hall Tax over the next four years, making Tennessee completely income-tax free beginning in January of 2021.

While the Hall Tax is currently levied on residents across all income levels, a total repeal provides a disproportionate tax cut to wealthy individuals. A study conducted by the Institute on Taxation and Economic Policy revealed that 63% of the cut will go to the top 5% of Tennessee residents by income level. The same study shows that the top 1% of Tennessee residents can expect on average $4,100 more per year due to the repeal, while the bottom 95% will not retain more than $50 more per year. There is little doubt that this tax cut predominantly benefits the already wealthy residents of the state and is not truly the universal cut that the government is attempting to portray it as.

With the repeal of the Hall Tax, lawmakers are exacerbating a problem that is already a significant source of income and wealth inequality. Because the state government does not receive any substantial revenue from income, it has been forced to levy taxes and fees in other forms that proportionally place a higher financial burden on the state’s low-income residents. A lack of revenue from an income tax has, for example, created a system in which 50% of government funds now come from the sales tax. According to the Tax Foundation, Tennessee now has the highest average combined sales tax rate in the country at 9.43%. The government has additionally levied taxes on necessities such as groceries, implemented and raised taxes on gasoline, and even increased the fees for driver’s licenses, marriage licenses, and birth and death certificates. Because the more significant taxes in the state are those on necessities such as food, clothing, and gasoline, low and middle-income residents end up paying a greater share of their earnings to the government. For example, since the sales tax is a standard rate for all income brackets, a Tennessean that does not earn as much may end up paying 9% of their income on groceries, while a wealthier individual may only pay 3% of their income on groceries. Rather than support those that earn less, the tax system disproportionately collects from people in lower income tiers, actively contributing to wealth and income inequality.

Abolishing the income tax is made even more impractical as it concurrently places a strain on government revenue needed to fund essential state projects. Several programs are at risk of being rolled back, particularly in the transportation and infrastructure sector. According to the Transportation Coalition of Tennessee, there exist over 8 billion dollars worth of committed yet unfunded transportation projects in the state, including building and expanding bridges, highways, and weight stations. In Nashville, the major transit expansion plan is off to a sluggish start due to a shortage of available funds to construct all necessary components. Transportation and the lack of funds devoted to it has therefore become a major point of political dissatisfaction, with even current governor Bill Haslam admitting in an interview with the Transit Alliance of Middle Tennessee that “the state’s problem is one of math.”

Over the past few years, funding has also become scarce for secondary education in Tennessee. Several counties have had to close or defund schools as a result of budget cuts. Among these is Williamson County, one of the wealthiest areas in Tennessee, which is cutting the budget of its main school district by 2% in response to decreased funding. Historically, state funds have accounted for 55% of the district’s budget, but that number has dropped down to around 45%. Legislators in the county are being forced to consider raising the sales and property taxes to provide adequate funding for future budgets, an option that would again disproportionately harm the working class.

While a lack of funding for government programs is a complex issue that involves several political factors, levying an income tax would substantially increase government revenue and provide more flexibility for the state to increase budgets for struggling initiatives. Further reducing taxes for wealthy residents should be one of the last considerations when the government is supplied with inadequate funds for programs designed to support all residents. The latest repeal in this tax code reinforces a political trend and system allowing the wealthiest to gain a radically disproportionate amount of economic power and influence, while those that earn the least are forced to pay more than their share. Tennessee’s tax code is an exemplary model for showing how an excessively regressive plan largely favors the upper class and intensifies socioeconomic inequality.