Background
In 1963, the Tennessee General Assembly enacted the “Local Option Revenue Act” which established the local option sales tax and set the maximum local tax rate at one-third of the state sales tax rate not to exceed $5 in local taxes on a single article.
In 1968, Chapter No. 488 increased the maximum local option sales tax rate to one-half of the state rate and increased the maximum local tax on a single article to $7.50.
In 1983, the General Assembly enacted Public Chapter No. 278 which increased the maximum sales price of a single article that was subject to the local sales tax to $667. In addition, this legislation provided for an additional $443 increase in the amount of local tax that could be collected on a single article phased-in over a two-year-period as follows: fiscal year 1984 the single article cap was increased to $889; fiscal year 1985 the single article cap was increased to $1,100.
In 1990, the cap on the amount of local sales tax that could be collected on a single article was again increased from $1,100 to its current level of $1,600.
However, in July of 2002, the General Assembly enacted a tax package (Public Chapter 856 of the Acts of 2002) that was anticipated to raise $933 million in new revenue and bring recurring revenues in line with recurring expenditures for the first time in years. As a result of the 2002 amendments to T.C.A. 67-6-702, the state now levies an additional 2.75 percent tax (total state sales tax of 9.75 percent) on each dollar of a single article in excess of $1,600 up to a maximum state cap of $3,200.
Problem
Over a seven-year period beginning in 1983 and ending in 1990, the single article cap was increased four times providing for a total increase of $933. These periodic increases in the cap helped to mitigate the effects of inflation on local revenues.
However, over the last 16 years, the single article cap on the local option sales tax has not been increased by so much as a penny. Consequently, inflation has caused the percent of local revenues derived from this tax to decline dramatically; thereby limiting the efficacy of a principal source of revenues currently available to local governments.
Therefore, the 2002 amendments present a double whammy to local governments in that they limit local governments’ ability to secure future increases in the single article cap to combat the effects of inflation on revenues and restrict a principle source of local revenues. As a result, local officials are forced to look elsewhere to satisfy citizens’ ever increasing demand for services.
Proposed Legislation
TML is seeking approval of legislation which eliminates the state imposed 2.75 percent tax rate on purchases of single articles between $1,600 and $3,200. Additionally, the legislation increases the local single article cap from $1,600 to $3,200.
Benefits to Municipalities
This proposed legislation will effectively allow local governments to collect local sales and use taxes on the first $3,200 of a single article. Based on state revenue figures from fiscal year 2008, the proposed change will produce approximately $48.8 million in additional revenues for municipalities and counties annually.
