(The Center Square) — Tennessee’s collection of taxes and fees are expected to continue to rise over the next two years, but the rate of increase won't match its recent record-breaking pace, according to estimates from the University of Tennessee’s Boyd Center for Business and Economic Research.
The numbers were presented as part of a series of financial presentations given to Tennessee’s State Funding Board as it prepares to give its estimates for the state’s finances for next fiscal year. Those estimates are then used in the state’s budget-making process.
The largest driver of those tax and fees collections are the state’s income tax collections, which increased by 11% from October 2021 to October 2022, according to numbers released this week.
Last fiscal year, sales tax collections finished $2.5 billion more than budgeted to help the state collect $4.6 billion more than the initial budget in tax and fee collections.
Dr. Don Bruce, a Professor of Economics and Director of the Boyd Center, showed that Tennessee’s gross domestic product growth of 8.6% from 2021 was above the 5.7% national average as Tennessee exceeded the economic numbers of other states such as Florida, Indiana and North Carolina.
After two years of double-digit percentage growth in sales tax collections, the Boyd Center believes the state will finish with a 7.7% year-over-year increase in sales tax collections this year and 4.1% increase in fiscal 2024, going from $12.8 billion collected last fiscal year to nearly $12.8 billion collected this fiscal year and $14.4 billion in fiscal 2024.
"Inflation does improve tax collections," Bruce explained. "But it remains a very difficult enterprise to forecast tax revenues."
The total tax and fee collections mirror the sales tax increases after last fiscal year showed a 16.6% year-over-year increase to $20.8 billion in overall collections. This year is expected to be 6.3% higher at $22.1 billion in collections before a 4% increase in fiscal 2024 to $23 billion in collections.
"Business activity is at an all-time high, sales tax collections are up dramatically due to our ability to collect taxes on online sales and give those to locations across the state where buyers are actually living," Bruce said. "All kinds of trends have given us two years of back-to-back double-digit growth. We are expecting moderation in that growth that will be driven by continued strong collections in sales and franchise and excise collections, two pillars are our state’s taxing functions."
Bruce noted that a decline in real estate growth will have an impact along with low unemployment and there are 2.5 job openings per unemployed person in the state.
Laurel Graefe, a regional executive with the Nashville branch of the Federal Reserve Bank of Atlanta, noted that since the COVID-19 pandemic there was first a surge in consumer spending that led to inflation in that sector when people couldn’t travel as much.
But while good price inflation is falling, service-oriented inflation is rising and accelerating due to the low unemployment rate and thus wage inflation.
"Until we see supply and demand come back closer into balance, it’s unlikely we’ll see a situation where wage inflation will decelerate," she said.
She said that consumer spending has remained strong, but there are signs of it softening as consumers begin to draw down savings through spending. She noted that overall savings remains in a strong historical place as savings continues to outpace the growth in wages.
"At some point, we recognize that this may not be sustainable," Graefe said. "At some point, savings will get to a point where consumers will have to make some tough decisions."
The State Funding Board is scheduled to meet at 2:15 p.m. on Nov. 28 to continue to consider its state revenue estimates for next fiscal year.