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 here’s the question—how does Tennessee pull that off and still run a balanced budget every year?
Let’s break it down.
No State Income Tax
Unlike most states, Tennessee doesn’t take a cut of your paycheck. The state used to tax some investment income, but even that “Hall tax” was fully repealed in 2021. Now, there’s no state tax on personal income at all.
So, how does the government make up for that missing money? By relying more heavily on other kinds of taxes.
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.
Low Property Taxes (by Design)
Homeowners in Tennessee enjoy some of the lowest property taxes in the nation—less than half a percent on average. For example, if you own a $400,000 house, the yearly property tax might be under $2,000, depending on the county.
These taxes are set by local governments (counties and cities), not the state. And there are rules in place that help prevent sudden big jumps when property values go up.
A 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.
Tourism Brings in Billions
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 system works because of a mix of things:
The Bottom Line
Tennessee has figured out a simple but effective formula: keep 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.
Rabello Group