(The Center Square) – Tennessee Gov. Bill Lee will hear from state agencies during four days of budget hearings that begin Tuesday.
The annual budget hearings give agencies an opportunity to tell the governor what they think their needs will be in fiscal year 2027, which begins July 1, 2026.
Each department will have 30 minutes to make its presentation. Lee will hear from the departments of Military, Safety and Homeland Security, Correction, Financial Institutions, Education, Health, Children’s Services, Human Services and Transportation on Tuesday.
Economists told the Tennessee State Funding Board on Tuesday that they were cautiously optimistic about revenue predictions for the upcoming fiscal year.
“I think we’re not really at risk of not being able to pay our bills, but we’re certainly not in a position to start large scale investments above and beyond what we’re doing now,” said Dr. Don Bruce, director of the Boyd Center for Economic and Business Research at the University of Tennessee. “Collections will be slow, steady, positive, could be much higher but could also be significantly lower.”
Bruce predicted a 2.3% increase in total revenues and a 1.3% increase in general funds.
Tennessee’s economy is heavily reliant on sales taxes. The Volunteer State is tied with Indiana, Mississippi, and Rhode Island for the second-highest state income tax in the country at 7%, according to the Tax Foundation. Local entities can add another 2.75%.
The state is used to seeing sales and use tax account for about 60% of total tax collections. That has increased to 67%, said Jeff Bjarke, research director for the Tennessee Department of Revenue. The change is based in part on a reduction in the corporate franchise and excise taxes, he said.
“But it definitely shows that we are more dependent on sales tax than we have been historically,” Bjarke said.
Retail sales are the most significant part of sales tax growth, according to Bjarke.
Trade policies are also affecting the state, according to Bruce.
“Tennessee is among the most manufacturing dependent southern states, susceptible to uncertainty from trade policies,” Bruce said in his presentation.
A survey by the Boyd Center shows that three-quarters of business leaders say tariffs are having an impact, with more than a quarter of them saying it affects them significantly, according to Bruce.
About 44% of the business leaders surveyed said they are passing tariff costs on to consumers, he said.
