Permanent Tax Reforms Trump Sales Tax Holidays


July 28, 2022 4:45PM

Tennessee has another tax-free holiday coming up this weekend, followed by a month-long sales tax holiday on groceries in August. In addition to the traditional annual sales tax holiday to coincide with the start of school, Gov. Lee and the legislature chose to return this year’s surplus revenue to taxpayers by also suspending the grocery tax for the entire month of August. Given the impact of supply chain disruption and crippling inflation on food prices, this will be a welcome reprieve for Tennesseans. 

But is it good long-term tax policy?

Sales tax-heavy states like Tennessee rely on these holidays to return money to taxpayers’ pockets. Since we don’t have an income tax, it’s one of the few ways to get tax dollars back to those who paid them. Despite their popularity, sales tax holidays have been routinely panned for simply shifting spending to different times rather than actually generating new economic activity. In the short run, they’re an efficient way to return extra revenue. But the long-term benefits are murky.

Deeper, more systemic tax reforms are a better way to address persistent revenue surpluses like those facing Tennessee. Specifically, reforming and reducing corporate taxes generates the most bang for your buck, boosting corporate investment and increasing workers’ incomes. The Tax Foundation recently reviewed a new study that shows “large and persistent” economic benefits when corporate taxes are cut.

Tennessee policymakers have a unique opportunity to do just that. We have had budget surpluses 10 of the last 12 years, yet our corporate franchise and excise tax is tied for the highest of all bordering states at 6.5%.

As lawmakers look for ways to give back excess tax revenue in the years ahead, rather than defaulting to short-term solutions like sales tax holidays, it’s time they start exploring permanent reforms like overhauling our franchise and excise tax. Doing so will have a lasting impact on our state and Tennesseans’ economic opportunities.