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Tennessee’s budget basics
According to the National Association of State Budget Officers (NASBO), Tennessee’s total expenditures in fiscal year (FY) 2020 were $37.4 billion, including general funds, other state funds, bonds, and federal funds. NASBO reported that total expenditures across all states in FY 2020 were $2.3 trillion, ranging from $4.7 billion in Wyoming to $337.7 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 $48.9 billion in FY 2018 (the most recent year census data were available), or $7,227 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 $9,801.
Tennessee’s largest spending areas per capita were public welfare ($1,765) and elementary and secondary education ($1,492). 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 $47.3 billion in FY 2018, or $6,983 per capita. National per capita general revenues were $10,071. 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 ($1,338) and charges ($1,254), 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 (27 Republicans to 6 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 2022 because representatives serve two-year terms. Senators serve four-year terms; roughly half the senatorial seats are on the ballot in 2022, and the other half will be up for election in 2024.
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 Lee released his FY 2021 budget proposal in February 2020. The proposed budget included $20.1 billion in state-supported spending (6 percent increase over FY 2020) and $40.8 billion in total spending (4 percent increase over FY 2020). However, in March, Governor Lee released a budget amendment that simultaneously allocated funds to address the pandemic and completely eliminated planned spending increases for several government agencies. In total, the governor reduced his proposed spending by roughly $900 million.
In April, Governor Lee signed a preliminary FY 2021 budget that included $39.8 billion in total spending. In June, the governor signed the final FY 2021 budget, which further lowered total spending to $39.4 billion, or $1.4 billion below the governor’s original proposal. To cover budget shortfalls, the enacted budget approved the use of one-time funds (such as the state’s reserves), spending cuts, and issuing bonds for capital projects previously funded by cash. In November, the governor further asked state agencies to prepare spending cuts ranging from 2 percent to 12 percent for the next fiscal year budget. The governor reports the state will ultimately spend $19.1 billion in FY 2021.
Governor Lee released his FY 2022 budget proposal and his State of the State address in February 2021. The governor’s budget proposes $21.0 billion in state-supported spending and $41.8 billion in total spending. Lee’s proposal includes more money for broadband, K-12 education, and a deposit 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 $50,547 in 2020, ranking 38th among the states. It was below both the national average of $59,729 and the Southeast regional average of $51,796. The state’s median household income (five-year estimate) was $53,320 in 2019, ranking 41st among the states and below the national average of $62,843. Tennessee’s poverty rate was 15.2 percent in 2019 (five-year estimate), above the national rate of 13.4 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 $32,193, and its poverty rate was 26.6 percent; the city of Brentwood’s median household income was $168,688, and its poverty rate was 2.5 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.)
Unemployment rates (like other economic indicators) often vary significantly by race and ethnicity. In Tennessee, the average unemployment rate in 2020 was 6.8 percent for white residents, 12.3 percent for Black residents, and 10.9 percent for Latino residents.