Congratulations Tennessee: You’ve Got the Most Regressive Tax System in America

With no income tax and high sales taxes, the state is asking poor people to pay far more than their fair share.

Mark Blinch / Reuters

NASHVILLE, Tenn.—The federal tax system is, on the whole, progressive. Higher-income households pay a higher share of their income in taxes. But some states have done all they can to reverse that. According to a study by economists at the Federal Reserve, Tennessee, Mississippi, and West Virginia have structured their tax codes so that middle and lower-income families pay a bigger share of their incomes than wealthy families do. Many economists, including Thomas Piketty, believe that such systems can make inequality worse.

Tennessee has taken this strategy the furthest: The state has the most regressive tax system in the country, according to the study: It has no state income tax (though it does tax interest on stocks and bonds) and, instead, the state relies on sales taxes and other fees to fill its coffers, although many luxury items are tax-free. Additionally, attorneys’ fees, services such as haircuts and massages, and goods for horses and airplanes are all tax-exempt.

“It’s just totally upside down,” said Dick Williams, chairman of Tennesseans for Fair Taxation, which has advocated for a state income tax. Williams’ group wants to get rid of the sales tax on food, and close some other tax loopholes. But that’s not the direction things have been going: Last November, voters passed a constitutional amendment that banned the state from levying any income or payroll tax. The measure passed by a margin of nearly two-to-one.

In 2001, Tennessee, facing an unprecedented budget crisis, debated introducing an income tax in the state. Spurred on by conservative talk-radio hosts, 2,000 protesters swarmed the Capitol, screaming “no means no,” and smashed a few windows. Riot police were called in, and a new group was born, Tennessee Tax Revolt. Almost all of the legislators who had publicly supported the income tax were voted out in the next election cycle.

But no income tax doesn’t mean there are no taxes. Tennessee has one of the highest combined local-state sales-tax rates in the country, at 9.45 percent, according to the Tax Foundation.

That ends up hitting people like Joseph Mitchell, 62, pretty hard. I spoke to Mitchell outside of a Kroger’s grocery store in Nashville, where he was unloading a few weeks’ worth of groceries into his trunk. His total taxes for the grocery trip—$10.97.

“It’s a Republican state, so the rich get what they want,” Mitchell told me. “It won’t change until the politics change.”

Mitchell said that he would prefer an income tax to ever-increasing sales taxes and fees. He also wouldn’t mind more taxes on the companies putting up huge apartment buildings and condos in Nashville or on the TV studios that increasingly film there, lured by tax breaks.

“The rich get richer and the poor get poorer,” said Mitchell, a retired educator who is still supporting a family.

But that doesn’t have to be the case. According to the Fed study, tax codes in some states, such as Minnesota, Oregon, and Wisconsin, “substantially mitigate income inequality.” Those states make their tax codes more equitable by exempting basic necessities from sales taxes, and by offering a significant state-level Earned Income Tax Credit.

“If all states switched to Minnesota’s tax code, after-tax wage inequality would fall,” the authors write.

Protests over the income tax in Nashville in 2002 (John Russell / AP)

By contrast, a switch to Tennessee’s tax code would significantly increase income inequality throughout the country because of the state’s lack of an income tax and its hefty taxes on food and clothing.

The kicker is that Tennessee’s tax code also isn’t working even by the most pragmatic measure: Is it providing enough revenue for the state to provide adequate public services? The answer is no. For example, booming Nashville is trying to put in public transit, but without an income tax, and local opposition to raising already-high sales taxes, it’s hard to find the money.

“If we had a revenue stream right now for transit, we would be building a transit line,” said Jo Ann Graves, the executive director of the Transit Alliance of Middle Tennessee.

Small towns and counties are struggling to raise revenues, too. Clay County, in northern Tennessee, had to close its school district until it figured out how to raise more revenue. (The county has proposed a wheel tax, which is essentially a vehicle-registration fee, but the vote isn’t until next year.) In August, state agencies were asked to offer cuts of 3.5 percent for the governor’s budget negotiations with the legislature.

To make ends meet, the state and its counties are getting creative, increasing fees for services such as driver’s and marriage licenses. The state recently increased fees for hunting and fishing licenses by 19 percent, and started charging more for birth and death certificates. One county implemented a policy to charge prisoners for things like toilet paper and pants.

Still, one of the hottest topics in Tennessee is a proposal to phase out the Hall income tax, which taxes investments on stocks and dividends. If that passes, Tennessee’s rich would pay even less.