Subject: Where the masks are
Bank of Tennessee
First Horizon both branches
Simmons on East Main
Volunteer State Bank both branches
Sumner Bank and Trust
Regions Bank both branches
This was recently provided to us from the Tennessee Municipal League
While Tennessee did not release any additional sales tax information this week, the US Gross Domestic Product (GDP) release contained purchasing information. This summary will go into more detail on the GDP estimates in the next section; however, the sales information may assist state and local option sales tax scenarios.
According to US Department of Commerce data, bigger ticket item sales such as large business equipment, cars, boats, and furniture fell dramatically (~16%). While potentially devastating for the state sales tax, this may not impact the local option sales tax as severely since the local option sales tax only applies to the first $1,600 of an item’s cost. For example, a $20,000 car purchases generates $1,400 in state sales tax, but, due to the single article cap, at the 2.75% local option rate it only generates $44 and not $550. A $500 purchase generates $35 in state sales tax ($1,365 or 98% less) and $13.75 in local option ($30.25 or 69% less). To the extent that a $20,000 item purchase does not occur or becomes a $500 item purchase instead then local governments will not be impacted as much as the state government.
In addition, non-durable good purchases increased substantially nationwide (~7%). Reports suggested this increase was driven by an increase in grocery, cleaning supplies, and paper product purchases. These items would be taxed at the prevailing local option sales tax rate; however, any food and food ingredients would be taxed at a 4% state food and food item rate instead of the 7% regular rate. To the extent a portion of the purchasing behavior migrated from certain higher taxed items (TV’s, cars, furniture) to the lower taxed items (like grocery food and bottled water) then this would reduce aggregate state tax collections while not necessarily impacting the local option sales tax as much.
However, it should be noted that this purchase migration may reduce state shared sales tax for cities and towns. For example:
Assume $1,000 is spent on items taxable at the 7% rate. These purchases would generate $70 in state revenue. State law shares 4.603% of the “undedicated” 5.5% with cities and towns. Thus, of that $70 cities and towns would share 4.603% of $55, or $2.53.
Now assume that same $1,000 is spent on items taxable at the 4% rate. That same amount of purchases would only generate $40 in state revenue. Cities and towns would share 4.603% of that $40 or $1.84. This purchasing migration resulted in a 27% reduction in state shared sales tax revenues.
This should not be interpreted as a reliable economic estimate; however, it can provide insight that local governments in the near-term may not experience the same sales tax pressure as the state. As more state level data is available, future summaries will provide additional insight into the potential sales tax impact.