State Policy Network
State Spotlight: Championing Innovators and Entrepreneurs in Tennessee

Starting a business is hard. Ask any entrepreneur trying to plant their flag and they’ll tell you the countless challenges they face. But of all those challenges, one is preventable: Burdensome government regulations and fees. As the Beacon Center’s Director of Policy and Research, Ron Shultis, explains, “A 2017 survey of entrepreneurs and small business owners found that the average regulatory cost for a new business in its first year is more than $83,000.”

Because Tennessee has no personal income tax and an overall low cost of government, it’s generally thought of as a low-tax state. But Tennessee’s business tax environment is one of the highest in the Southeast and a drag on the state’s overall competitiveness. For example, of Tennessee’s eight bordering states, only Alabama has a similar corporate tax rate of 6.5%.

So with Tennessee’s overall tax competitiveness contrasting with the state’s high business tax environment, the Beacon Center set out to make Tennessee the number one state for innovators and entrepreneurs.

One of their first steps in that mission was taking on the “Innovation Tax.”

The Beacon Center stops impending tax hike to make Tennessee more friendly for entrepreneurs

In the fall of 2021, the Beacon team—armed with research and resources from SPN on the American Rescue Plan Act—found out about the upcoming “Innovation Tax” set to take effect on January 1, 2022. As Patrick Gleason, Beacon’s Senior Fellow for Tax Policy, explains, “For decades, companies and innovators could fully deduct research and development costs. While the Tax Cuts & Jobs Act (TCJA), the federal tax reform bill signed into law at the end of 2017, improved the federal tax code on net and provided tax relief for the vast majority of Americans, one of the few downsides of the TCJA was that it ended that deduction starting in this year. Now companies must amortize research and development expenses over five years. To make matters worse, Tennessee, like most states, automatically conforms to the federal tax code. That means that the TJCA’s change would also raise corporate taxes on innovative companies here in Tennessee. ‘Decoupling’ or stopping the automatic update of the change at the federal level would allow companies in Tennessee to continue to fully deduct R&D expenses.”

Tennessee businesses couldn’t afford to pay a new tax on top of the state’s already onerous corporate tax. So In preparation for the 2022 legislative session, Beacon reached out to the Tennessee state Chamber of Commerce about fighting the upcoming Innovation Tax. The Chamber immediately realized the potential of this reform and agreed to help. Then, in September of 2021, Beacon briefed Tennessee Governor Bill Lee’s Director of Policy on the upcoming tax, Tennessee’s tax conformity with the federal code, and the opportunity to decouple from the impending tax to make the state more competitive. After the success of those conversations, Beacon was asked to write the Governor and ask that he make Beacon’s proposal part of his legislative agenda for 2022.

Because of Beacon’s strong relationship with the governor, and the in-depth research they provided, the governor included decoupling the upcoming federal innovation tax from Tennessee’s tax code in his legislative agenda for the 2022 legislative session. Then, all throughout the session, Beacon produced content to drum up interest and support for the measure. Beacon also worked with their allies to earn local and national press coverage of their reform and worked with their 501c4 advocacy arm to make calls to action to a network of grassroot supporters across the state.

As a result of Beacon’s campaign, the measure passed unanimously.

Tennessee was the first and only state to decouple from this tax hike which immediately made the state more economically competitive.

Shultis explains, “For years, Beacon has made part of our mission to get the government out of the way of innovators and entrepreneurs and make Tennessee the best state to start and grow a business. As part of that effort, we are always looking to identify policies—like preventing the “Innovation Tax” from going into effect—that would make our tax and business environment more friendly. By decoupling from the impending federal “Innovation Tax” Tennessee arguably became the best state in the country for businesses looking to conduct R&D. Our efforts and success made national news and highlights how strategic tax reform, even if not the largest tax cut, can have a big impact in improving a state’s economic competitiveness.”

Starting, building, and growing a business will always be hard. It should be. Making something important requires some sacrifice. But now, thanks to Beacon’s incredible innovation and entrepreneurship campaign, overly burdensome and expensive government regulations won’t hider entrepreneurs from innovating in Tennessee.

Categories: News
Organization: State Policy Network