Tennessee’s budget basics
According to the National Association of State Budget Officers (NASBO), Tennessee’s total expenditures in fiscal year (FY) 2019 were $36.9 billion, including general funds, other state funds, bonds, and federal funds. NASBO reported that total expenditures across all states in FY 2019 were $2.1 trillion, ranging from $4.5 billion in South Dakota to $311.3 billion in California.
Each state allocates spending and taxes differently among different levels of governments, and local governments often administer programs with state funds, so combined state and local government data show a more complete picture of individual benefits and contributions when comparing states.
Per the US Census Bureau, Tennessee’s combined state and local direct general expenditures were $46.4 billion in FY 2017 (the most recent year census data were available), or $6,918 per capita. (Census data exclude “business-like” activities such as utilities and transfers between state and local governments.) National per capita direct general expenditures were $9,446.
Tennessee’s largest spending areas per capita were public welfare ($1,745) and elementary and secondary education ($1,459). The Census Bureau includes most Medicaid spending in public welfare but also allocates some of it to public hospitals. Per capita spending is useful for state comparisons but is an incomplete metric because it doesn’t provide any information about a state’s demographics, policy decisions, administrative procedures, or residents’ choices.
Tennessee’s combined state and local general revenues were $46.4 billion in FY 2017, or $6,919 per capita. National per capita general revenues were $9,592. Tennessee does not levy an individual income tax on salaries and wages but does tax bond interest and stock dividends. After federal transfers, Tennessee’s largest sources of per capita revenue were general sales taxes ($1,397) and charges ($1,220), such as state university tuition and highway tolls.
Governor Bill Lee, a Republican, was elected in 2018 with 60 percent of the vote. The next gubernatorial election is in 2022.
Republicans control both the House of Representatives (73 Republicans to 26 Democrats) and Senate (28 Republicans to 5 Democrats), with veto-proof majorities in both houses. Control of the governor’s mansion and each house of the legislature gives Republicans a trifecta in Tennessee. All Tennessee House seats are on the ballot in 2020 because representatives serve two-year terms. Senators serve four-year terms; roughly half the senatorial seats are on the ballot in 2020, and the other half will be up for election in 2022.
Tennessee’s budget institutions, rules, and constraints
Tennessee uses an annual budget. The legislature is not required to pass a balanced budget, nor is the governor required to sign one, and deficits may be carried over into the following year. However, the state has budget rules that require lawmakers to balance revenues and expenditures. Tennessee also limits annual spending growth with a budget rule based on personal income growth. The limitation can be overridden with a simple legislative majority vote, though. Tennessee also limits total authorized debt and debt service incurred by the state.
(Note: Some states have informal budget institutions that constrain overall spending growth or a specific expenditure’s growth.)
Tennessee’s recent fiscal debates
- Tennessee does not have a broad-based individual income tax, but (like New Hampshire) taxes some very limited income. Known in the state as the Hall tax (after the senator who sponsored the legislation in 1929), Tennessee taxes only income earned from bonds and stock dividends. In 2016, however, the state passed legislation that reduced the tax rate (then 6 percent) by 1 percentage point annually (the rate is 2 percent in tax year 2020) until the tax is completely phased out in 2021. When that happens, Tennessee will become the eighth state that does not tax income of any kind.
- Tennessee is one of 14 states that have not accepted funds for expanding Medicaid eligibility created by the Affordable Care Act. The Urban Institute estimates that if Tennessee had accepted Medicaid expansion, it would have received 8.2 percent more federal Medicaid funds ($786 million) and increased its state spending on Medicaid 5.0 percent ($191 million). Urban estimates that savings from Medicaid expansion (e.g., lower spending on uncompensated care) would, like with other states, fully or largely offset Tennessee’s additional direct state spending. Tennessee was the first state to formally request the federal government transition its Medicaid funding into a block grant. After a comment period, the federal government will negotitate an agreement with the state in 2020. Any deal would then need approval from the state legislature.
- In 2019, Governor Lee signed a bill that created the Education Savings Accounts program, which offers students thousands of dollars in school vouchers for private school tuition. To qualify for an account, a student must live in a low-performing school district and his or her family must meet income qualifications. The state estimates the program will cost roughly $100 million a year, with costs increasing as the state allows more students to enroll in the program.
Tennessee’s current budget
Governor Bill Lee released his proposed FY 2020 budget in March 2019. The governor highlighted his new education spending programs, including $70 million in salary increases for teachers and other public education employees, in both his budget presentation and 2019 state of the state address. Programs assisting rural communities, such as more spending on broadband access, were also highlighted in Governor Lee’s budget. His plan also recommended depositing $225 million into the state’s rainy-day fund.
The legislature passed its budget in May 2019. The enacted budget generally followed the governor’s recommendations: it includes increased spending on K–12 education and rural development plus $239 million allocated to the state’s rainy day fund.
For more on Tennessee’s budget, see
Tennessee’s economic trends
Tennessee’s per capita income (per the Bureau of Economic Analysis) was $48,761 in 2019, ranking 35th among the states. It was below both the national average of $56,663 and the Southeast regional average of $49,145. The state’s median household income (five-year estimate) was $50,972 in 2018, ranking 43rd among the states and below the national average of $60,293. Tennessee’s poverty rate was 16.1 percent in 2018 (five-year estimate), above the national rate of 14.1 percent.
Although Tennessee’s averages tell a story about the entire state, Tennessee is composed of diverse localities. For example, the city of Morristown’s median household income was $32,386, and its poverty rate was 27.8 percent; the city of Brentwood’s median household income was $160,597, and its poverty rate was 2.8 percent.
Tennessee’s unemployment rate historically tracks the national average, though the state rate is more volatile than the US rate. (See how COVID-19 is affecting state employment and earnings data.)
The major industries that contributed the most to Tennessee’s gross domestic product (GDP) in 2019 were finance, manufacturing, professional services, social services (i.e. health and education), and government. Manufacturing and social services contributed more to Tennessee’s GDP than they did to the nation’s and region’s GDP, while finance, professional services, and government were less important to Tennessee than they were to the nation and region in 2019.
Looking at more specific industries, among those that accounted for at least one percent of Tennessee’s GDP in 2018, motor vehicle manufacturing produced far more for the state than for the nation, contributing 2.8 percent to Tennessee’s GDP and 0.8 percent to the nation’s. Other industries that overperformed in Tennessee relative to national averages in 2018 were retail, ambulatory health care services, hospitals, and performing arts.