When people move to Tennessee, one of the first things they notice is how affordable it feels compared to other states. The big headline is: no state income tax and low property taxes. But what's even more impressive is that the state can offer these low taxes while staying compliant with their Balanced Budget Rule.
What is the Balanced Budget Rule? Tennessee’s constitution requires the state to balance its budget every single year. That means the state can’t spend more money than it brings in, and it can’t run up debt to cover everyday expenses. In other words: if money coming in slows down, the state has to adjust its spending. And when extra money comes in, Tennessee often saves it for a rainy day or puts it toward one-time projects instead of making promises it can’t keep.
So the question is: where does the state make its tax revenue to be able to cover its expenses?
Sales Tax Does the Heavy Lifting
The biggest source of money for Tennessee is the sales tax—the extra percentage added when you buy things like clothes, furniture, or even groceries.
The state sales tax is 7%.
When you add in local sales taxes, the average rate is about 9.5%—one of the highest in the country.
It may sound high, but remember: visitors pay it too. So when tourists spend money here, they help fund local services instead of that falling only on residents.
Tourism Also Brings in Billions Annually
Tourism is another big piece of the puzzle. Tennessee is a magnet for visitors—think Nashville’s music scene, the Smoky Mountains, and Graceland.
In 2024 alone, visitors spent $31.7 billion in the state. That spending created about $3.3 billion in tax revenue for state and local governments. The best part? Most of that tax money comes from out-of-towners, which helps lighten the load for Tennessee residents.
Putting It All Together
Tennessee’s balanced budget system works because of a combination of variables.
No income tax and low property taxes makes the state attractive to workers and retirees, casuing the population to continue to boom.
Sales tax from these locals brings in the bulk of state revenue to offset the above.
While tourism sales tax revenue contributes as well.
Tennessee has figured out a simple but effective formula: keep majority of taxes light for residents, rely on strong tourism and spending, and never spend more than you bring in. That’s why families, retirees, and businesses alike are drawn to the Volunteer State—and why the state can keep running smoothly without raising the burden on everyday homeowners.
