Tennessee experienced a significant drop in business tax revenues, exceeding $721 million between 2024 and 2025. This decline follows two years of corporate tax credits, putting added strain on the state’s sales tax to bolster its budget.

The federal government reduced franchise and excise taxes substantially in 2023 and 2024. As a result, corporate tax collections fell by 15.8% in the fiscal year that ended in July, reflecting a $721.5 million decrease compared to the previous year.

Interestingly, during this period, sales tax collections rose by 4.2%, amounting to $596 million, as reported by the state’s latest data.

Overall, tax revenue for the year was nearly 1% above expectations, totaling $206.5 million, although it was still $75.2 million lower than the previous year’s collections. The state’s budget stands at $59.8 billion.

Despite the downturn, Finance and Trustee Jim Bryson assured that “the outlook remains strong,” noting that revenue still surpassed state estimates.

With the medium-term outlook appearing grim following the corporate tax cuts, the Tennessee Funding Commission downgraded its growth forecast to negative figures, which could offer an opportunity to balance the budget more effectively.

Senate Finance Committee Chairman Bo Watson expressed satisfaction with the results, mentioning that “we have an essentially consumer-based tax system.” He acknowledged that this places more pressure on the state to foster economic growth and keep consumer spending robust.

Tennessee lawmakers introduced a three-year refund program estimated to cost $7.4 billion in 2024, coinciding with multiple tax cuts that reduced a portion of the state’s business taxes. Critics argue that Tennessee’s tax system is regressive, with low-income families facing a higher effective tax rate than wealthier families and businesses. Interestingly, a nonpartisan group, Thinktennessee, noted that the state has one of the lowest tax burdens in the nation.

Lawmakers revised the real estate segment of the franchise tax in 2024, a change estimated to cost $4 billion over the next decade, culminating in a corporate refund totaling $1.55 billion.

Last year, Governor Bill Lee’s administration advocated for tax cuts and refunds, citing the need to preempt legal challenges. After encountering lawsuits, more than 80 individuals sought refunds when the issue arose last year. The state dispensed around 70,000 rebates this past spring.

Some legislators commented on the ongoing legal disputes surrounding state business taxes, while others defended the tax cuts as beneficial policy. Conversely, Democrats critiqued these cuts as detrimental, coining them “a massive storm for businesses” that endangers funding for schools, roads, and public safety.

Democratic Senators Sherlan Oliver and Aftin Bain proposed legislation to reduce the state sales tax on groceries by about 4%. However, their bill did not progress. Oliver remarked that after 15 years of Republican leadership, Tennessee has one of the highest grocery tax rates in the nation.

Oliver asserted, “It’s not a coincidence. It’s a choice,” suggesting that the actions taken by Lee and the Republicans appear to favor corporations at the expense of working families, like nurses and construction workers, who end up paying a higher effective tax rate than their employers.

In a recent development, Congress approved sales tax holidays after previously providing relief to drivers two years ago and extending these holidays into 2024.

State officials recognized the potential revenue challenges midway through the last fiscal year and adjusted the forecast for this year, anticipating a total tax range from negative 1.68% to negative 1.34%.

In light of the community pandemic, the federal government had previously injected funds into the states, but those resources are now dwindling. The state is also bracing for possible federal funding reductions next year, influenced by cost-cutting measures initiated during the Trump administration.