Tax the Poor? How Tennessee’s Tax Structure Places a Disproportionate Burden on Its Poorest Residents

Tax the Poor? How Tennessee’s Tax Structure Places a Disproportionate Burden on Its Poorest Residents

By: Evan Kluth

As the April 15 tax deadline draws near and citizens file their tax returns, many in the United States will be grateful to live in a state with no state income tax, like Tennessee. Tennessee markets itself as a generally low-tax state; former Tennessee Governor Bill Haslam promoted Tennessee’s tax policies by exhorting citizens of the Volunteer State to “maintain our strong record of low taxes and low debt”^[1] and indicated that Tennessee’s state tax policies were a “huge economic advantage.”^[2] Forbes Magazine and Tax Foundation recognize Tennessee as the state with the third lowest tax burden in the nation.^[3] Behind the veneer of a low-tax, business, and taxpayer-friendly state, however, is a substantial reliance on sales taxes, which disproportionately burdens the lowest-income earners in Tennessee. The Volunteer State amended its constitution in 2014 to prohibit lawmakers from ever instituting a state income tax on earned income.[4] Governor Bill Lee signed into law an erasure of the last vestiges of state income tax on investments in 2016, making Tennessee a true no income tax state.[5] Because Tennessee constitutionally forbids a state income tax and instead relies heavily on sales tax, the system is effectively regressive.^[6]

Tax policy typically falls into one of three categories: progressive, flat, and regressive.[7] A progressive tax scheme, broadly speaking, taxes higher earners at a higher percent on their next marginal dollar earned than it taxes lower income earners on their next marginal dollar earned.^[8] Part of the appeal of a progressive tax comes from the idea of marginal utility: for higher income earners, the next dollar that they earn does not impart to the taxpayer as much utility^[9] (i.e. joy, happiness, satisfaction) as the previous dollars.^[10] Thus, not only do the higher earners have more ability to pay (because they have more dollars), but it also wouldn’t “hurt” them as much as it “hurts” a lower-income taxpayer. The next dollars the high-income earners earn provide less utility to them.^[11] The logical conclusion of the marginal utility theory requires that in a progressive system, higher earners have a higher marginal tax rate than lower earners.^[12]

A flat tax is a flat rate for each individual imposed on earned income.^[13] A flat tax rate carries intuitive appeal as equitable since each taxpayer pays the same percent of income; however, some argue (based on the marginal utility theory above) that a 10% tax on an income of $500,000 would not impact the wealthier taxpayer to the same degree that a 10% tax on an income of $30,000 would. In this case, though the tax burden is technically the same, it has a lesser impact on the wealthier taxpayer than it does on the poorer taxpayer. This makes it a little more regressive in utilitarian implications, even if it is not regressive in absolute dollar amounts or percentages.

A regressive tax policy requires the lower income earners to pay a higher percentage of their income in taxes, though not necessarily a higher absolute number.^[14] For example, a legislature would be loath to pass a bill if it explicitly stated, “we will tax the bottom 20% earners at a 15% tax rate and the highest earners at a 1% tax rate.” However, there are many forms of taxation that end up being regressive in effect, requiring lower income earners to pay a higher proportion of their income in taxes.^[15] A common example of an effectively regressive tax is a sales tax. Each individual in a city or state pays the same tax rate on each good purchased, which taxpayers may intuit as a flat tax. However, as a proportion of income spent, a sales tax affects poorer citizens in a more drastic way: they generally spend a higher percentage of their income on sales-taxable items than high-income earners do.^[16] Thus, lower-income citizens pay a higher percentage of their income in sales taxes than others. Higher-income earners have a greater opportunity to invest or save a greater percentage of their income sales tax-free.^[17]

Tennessee’s effectively regressive tax policy has a disproportionate impact on the poorest Tennesseans and its citizens of color: The Volunteer state’s population is 75% White, 16% Black, 6% Hispanic, and 3% other.^[18] The income of the various demographic groups helps to uncover how truly regressive and disparately impactful the system of taxation is toward racial minorities.^[19]

In Tennessee in 2023, white households earned a median income of $72,300.^[20] Hispanic households earned a median income of $63,600.^[21] Black households earned a median income of $50,100.^[22] Thus, because Tennessee’s high reliance on sales tax is effectively regressive, the average Black or Hispanic household will pay a higher proportion of its income in tax than the average White Tennessee household since, on average, Black and Hispanic families have the lowest median income.^[23] This does not ascribe discriminatory motive to the policymakers of Tennessee, as some commentators suggest, or mean that the state tax code is inherently racist.^[24] However, policy makers should grapple with this disparity as they draft policies, and they should question whether the policies are likely to impose disproportionate tax burdens on the lowest income earners and thereby racial minorities.^[25]

Tennessee is a generally low tax state, and its population is rapidly expanding as people flee higher tax burden states and relocate to lower tax ones, like Tennessee, Texas, and Florida. Charged with the responsibility to evaluate which tax policies help and harm Tennesseans, the Tennessee legislature should keep in mind the moral and political calculations that come with each proposed policy.

^[1] Now We Must…Maintain Our Strong Record Of Low Taxes and Low Debt, TN.gov, https://www.tn.gov/tnwilllead/government.html; see also Haslam Highlights Cut in Grocery Tax Provided by IMPROVE Act, TN.gov (July 6, 2017, 12:08 PM), https://www.tn.gov/former-governor-haslam/news/2017/7/6/haslam-highlights-cut-in-grocery-tax-provided-by-improve-act.html (showing Governor Haslam also engaged in retail politics to market his tax cuts for groceries in the 2017 IMPROVE Act).

^[2] Dave Flessner, No Income Tax is Growing Economic Advantage for Tennessee, Governor Says, Chattanooga Times Free Press (Nov. 8, 2018, 11:00 PM), https://www.timesfreepress.com/news/2018/nov/08/no-income-tax-growing-economic-advantage-tenn/.

^[3] Erica York & Jared Walczak, State and Local Tax Burdens, Calendar Year 2022, Tax Foundation (April 7, 2022), https://taxfoundation.org/data/all/state/tax-burden-by-state-2022/; see also Patrick Gleason, Tennessee Governor Seeks to Make One of the Nation’s Best Tax Climates Even More Hospitable, Forbes (March 6, 2023, 2:38 PM), https://www.forbes.com/sites/patrickgleason/2023/03/06/tennessee-governor-seeks-to-make-one-of-the-nations-best-tax-climates-even-more-hospitable/.

[4] Nina Cardona, State Income Tax Ban Approved by Tennessee Voters, WPLN News (Nov. 5, 2014), https://wpln.org/post/state-income-tax-ban-approved-tennessee-voters/.

[5] Richard Locker, Gov. Bill Haslam Signs Hall Income Tax Cut, Repeal into Law, The Tennessean (May 20, 2016), https://www.tennessean.com/story/news/politics/2016/05/20/gov-bill-haslam-signs-hall-income-tax-cut-repeal-into-law/84044810/.

^[6] Daniel H. Cooper, et al., The Role of Taxes in Mitigating Income Inequality Across the U.S. States, 68 Nat’l Tax J. 943, 954 (2015); see also Dave Flessner, Fed Study: Tennessee Has Most Regressive Tax System, Chattanooga Times Free Press, https://www.timesfreepress.com/news/2015/may/27/fed-study-tennessee-hmost-regressive-tax-syst/ (last updated May 27, 2015, 4:22 AM); Federal Study: Tenn. Has the Most Regressive Tax System, The Daily Herald (May 27, 2015, 10:43 AM), https://www.columbiadailyherald.com/story/news/local/2015/05/27/federal-study-tenn-has-most/25702801007/ (“A new study by a trio of economists from the Federal Reserve Bank found that Tennessee has the most regressive tax system of any state, requiring poor and middle-class taxpayers, in most instances, to pay a bigger share of their income than do wealthy individuals in the Volunteer State.”).

Tennessee also does not exempt food or clothing from sales tax and does not tax individual income (earned or passive).

[7] Hamill, The Vast Injustice Perpetuated by State and Local Tax Policy, 37 Hofstra L. Rev. 117, 120 (2008).

^[8] IRS Releases Tax Inflation Adjustments for Tax Year 2025, IRS (Oct 22, 2024), https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2025#:~:text=For%20single%20taxpayers%20and%20married,%24800%20from%20tax%20year%202024.

^[9] See generally John Bloome, Utility, 7 Cambridge University Press 1 (2008), https://www.cambridge.org/core/journals/economics-and-philosophy/article/abs/utility/56CF937C558E9733551694609069B2E1 (explaining utility and the concept of utilitarianism).

^[10] James Rolph Edwards, The Costs of Public Income Distribution and Private Charity, 21 J. of Libertarian Stud., 3, 5 (2007).

^[11] Id.

^[12] A common misconception with tax brackets is that being “bumped into the next tax bracket” means you make less money overall than if you had stayed at the top of your previous tax bracket. This is not true. The first $11,600 an individual taxpayer makes is all taxed at the same 10% rate; the next dollars earned from $11,600 to $47,150 are all taxed at 12%, etc. So, each increase in income does not increase taxation on the first dollar of income, but only on the next dollar of income. Each “tax bracket” bump does not decrease a taxpayer’s net take-home income.

^[13] To see this effect on hypothetical taxpayers Dylan and Nico, if they each earn a $30,000 salary and a $500,000 salary, respectively, and the flat tax rate is 10%, they would pay $3,000 and $50,000 in tax, respectively. The argument from the marginal utility is that Dylan, though he pays substantially less in tax and pays the same percentage of his income in tax, would “feel” the tax burden more than Nico would, whose next marginal dollars provide him with less utility than Dylan’s next marginal dollars.

^[14] Regressive Tax, Tax Foundation, https://taxfoundation.org/taxedu/glossary/regressive-tax/.

^[15] Id.

^[16] Goldburn P. Maynard Jr. & David Gamage, Wage Enslavement: How the Tax System Holds Back Historically Disadvantaged Groups of Americans, 110 Ky. L.J. 665, 689–90 (2022).

^[17] See generally Dynan, et al., Do the Rich Save More? 132 J. of Pol. Econ. 397, 424 (2004); see also Robert Gebeloff, Who Owns Stocks? Explaining the Rise in Inequality During the Pandemic, NY Times (Jan. 26, 2021), https://www.nytimes.com/2021/01/26/upshot/stocks-pandemic-inequality.html.

^[18]Tennessee Income – Table: Median Family Income, Nat’l Inst. on Minority Health and Health Disparities, https://hdpulse.nimhd.nih.gov/data-portal/social/table?socialtopic=030&socialtopic_options=social_6&demo=00010&demo_options=income_3&race=04&race_options=race_7&sex=0&sex_options=sexboth_1&age=001&age_options=ageall_1&statefips=47&statefips_options=area_states (last visited March 17, 2025).

^[19] To be clear, a policy with a disparate impact does not intend to discriminate against certain groups but ends up doing so anyway. This is typically understood in contrast to discriminatory policies, which, of course, intentionally treat different groups of people differently.

^[20] Josiah Hoss, 2023 Census Data on Income & Poverty in Tennessee, The Sycamore Inst. (Oct. 31, 2024), https://sycamoretn.org/2023-income-poverty-tn/#:~:text=In%202023%2C%20black%20Tennesseans%2C%20adults,household%2C%20and%20single%20mother%20households.

^[21] Id.

^[22] Id.

^[23] Taxes and Racial Equity: An Overview of State and Local Policy Impacts, Inst. on Tax’n and Econ. Pol’y (March 31, 2021), https://itep.org/taxes-and-racial-equity/#_ednref29; see also ITEP’s Approach to Modeling Taxes by Race and Ethnicity, Inst. on Tax’n and Econ. Pol’y ( https://itep.org/itep-tax-model/iteps-approach-to-modeling-taxes-by-race-and-ethnicity/ (last visited March 17, 2025)

^[24] Francine J. Lipman, How to Design an Antiracist State and Local Tax System, 52 Seton Hall L. Rev. 1531, 1535 (2022).

^[25] In light of these statistics, some have called for more progressive tax rates (i.e., a state income tax or a wealth tax) in the name of racial equity, but others have questioned the idea of identifying taxpayers by race at all; to analogize to the federal tax system, the IRS does not and has never sought in any way to ascertain, and never has asked a single question about race. However, some argue that the IRS should ask questions about race to ascertain and mitigate systemic disadvantages that historically marginalized groups face. See generally Jeremy Bearer-Friend, The Common Sense of a Wealth Tax: Thomas Paine and Taxation as Freedom from Aristocracy, 26 Fl Tax Rev. 326 (2023). The Internal Revenue Service (IRS) has been running such an experiment in colorblindness since the creation of Form 1040 in 1913 that continues to this day. Bearer-Friend argues that colorblind tax data needlessly blind us to how the burdens and benefits of our own tax laws are distributed. Indeed, colorblind tax data not only obscure the disparate racial impact of our tax policies but may preserve such inequality. Id.