Tennessee economists set the stage for a new budget cycle
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Tennessee's economy will experience modest growth over the next year, experts told state leaders this month, although a new tax cut for businesses is already dampening the impact of strong sales tax revenue.
Why it matters: The state's revenue outlook lays the groundwork for the 2025-26 budget, which is already taking shape.
- A panel of economists who spoke at a recent meeting of the State Funding Board were generally optimistic.
The big picture: Lawmakers approved the whopping $1.9 billion tax cut and refund for businesses in April.
- A significant hit was expected: The 2024-25 budget was dialed back to make room for the cut.
- The economists said overall revenue could be lower this year as a result of the cut, but generally agreed it will rebound and tick up a bit in the upcoming 2025-26 fiscal year, which begins in July.
Supporters of the tax cut, including Gov. Bill Lee, argued the design of Tennessee's franchise tax on businesses violated the U.S. Constitution. They said a cadre of Tennessee businesses could sue the state unless lawmakers approved a change that slashed collections.
- Opponents said Republican leaders were acting too quickly to appease businesses before considering less costly options.
By the numbers: Don Bruce, director of the Boyd Center for Business and Economic Research at the University of Tennessee, projected franchise tax collections would drop more than $782 million during the current fiscal year, which began in July.
- At the same time, his projection showed sales tax revenue growing by nearly $500 million.
- Bruce said there would be modest revenue growth during the 2025-26 budget cycle, after the state adjusts to the new baseline for business tax collections.
The bottom line: "All things considered, the Tennessee economy has been growing quite well," Bruce said.
- "We don't really have anything in our models that suggest that's going to change anytime soon."
Between the lines: Lee met with state department heads this month to discuss 2025-26 budget needs. Revenue growth could stave off cuts and fund new projects.
What they're saying: Lee spokesperson Elizabeth Johnson tells Axios that, even with modest growth, "base revenues are still approximately 40% higher than pre-pandemic levels."
- "Gov. Lee looks forward to partnering with the General Assembly to address a number of important issues in next year's budget."
The other side: Democrats said even the rosiest estimates for 2025-26 growth wouldn't pay for requested budget increases due to the effect of "corporate tax giveaways."
- "It won't be nearly enough to cover the increasing cost of doing state business," Senate Democratic Caucus spokesperson Brandon Puttbrese said in a statement.
What's next: The State Funding Board meets Monday to set official 2025-26 revenue projections.
- Lee will announce his budget proposal in early 2025.