When you think of Tennessee, country music might come to mind, as well as Nashville, BBQ, and—if you’re a policy wonk—low taxes. Tennessee is a low-tax state, and notably it’s one of only nine states without an income tax.
Despite its notoriety for low taxes, the state’s business tax climate is rather uncompetitive. In fact, the Tax Foundation ranked Tennessee 42nd out of 50 for corporate taxes in the Foundation’s 2024 State Business Tax Climate Index. One reason for this low ranking is the state’s franchise tax, which is the fourth highest in the nation.
The franchise tax is essentially a tax for doing business in a state. Sixteen states, including Tennessee, have a franchise tax. In the Volunteer State, even businesses that don’t make a profit must pay this tax, making it very harmful to new businesses and startups that have yet to make money.
The tax is levied based on the greater of the company’s net worth or the book value of real or personal property owned or used by the state. As the Beacon Center of Tennessee explains, the “greater of” format unfairly punishes businesses and sectors with large amounts of machinery and other equipment.
What makes the franchise tax even more burdensome for businesses is that Tennessee is one of the few states without a cap on its franchise tax liability—which means some businesses must pay exorbitant costs just to operate.
In 2023, the Beacon Center, a nonprofit policy organization in Nashville working to improve the lives of Tennesseans, released a report that outlined how to make the state the innovation capital of America. The report proposed 16 policies that would make Tennessee the hub for entrepreneurship and innovation in America, one of which was to lower the franchise tax rate and eliminate the “greater of” format of the tax and make it solely on a company’s net worth.
That year policymakers passed the Tennessee Works Tax Act, which included an exemption of a company’s first $500,000 in property from the tax, mitigating the unfair aspect of the tax.
In 2024, the Legislature followed that up with an even bigger tax cut, fully implementing Beacon’s recommendation by eliminating the “greater of” nature of the tax and cutting the rate on a company’s net worth by 20 percent. This is an ongoing $400 million tax cut for Tennessee businesses.
Reforming the franchise tax will lower the cost of doing business in the state, which will especially help small business owners and entrepreneurs—who don’t always have the means to incur these extra costs. It will also make Tennessee more attractive to out-of-state businesses that are interested in opening in the state. Overall, this reform will help businesses grow, creating jobs and making the state more competitive.
Beacon Center president and CEO Justin Owen added:
“Beacon has said for years that we want Tennessee to be the place people come to work, to retire, to raise their families, and to start their businesses. While we have one of the friendlier tax climates in the country, there’s always room for improvement. After Beacon’s Entrepreneurship & Innovation Council called for corporate tax reform, it only took the General Assembly one year to act, reforming the tax and saving Tennesseans $400 million a year. Year after year, we are securing huge tax cuts in Tennessee, making our state an even better place to live.”
Making Tennessee the Innovation Capital of America
Beacon Center of Tennessee
