You’ve probably heard the rumors. People are flocking to Nashville and Knoxville, often with a glint in their eye and a whisper about "no taxes." It sounds like a financial utopia, right? No income tax, no problem.
Well, kinda.
While Tennessee is famously one of the few states that doesn't take a bite out of your paycheck, the government still has bills to pay. If they aren't getting money from your W-2, they're getting it from your grocery cart, your business, and your Amazon deliveries. Understanding what is the state tax in tennessee requires looking past the "no income tax" headline to see where the real costs live.
The Income Tax Illusion
Let's clear the air immediately: there is no state income tax in Tennessee.
It wasn't always this simple. Up until 2021, the state had something called the Hall Income Tax. This wasn't a tax on your salary, but it hit you if you made money from interest and dividends. It was basically a tax on retirees and investors. But as of January 1, 2021, that was fully repealed.
Honestly, it’s a massive draw for high earners. If you're moving from a state like California or New York, the sudden lack of a 5% or 10% state tax bracket feels like a massive raise. You just see more money in your bank account every two weeks. Period.
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The Sales Tax Sticker Shock
Here is the catch. Because Tennessee doesn't tax what you earn, they tax the heck out of what you spend.
Tennessee has one of the highest sales tax rates in the United States. The state sales tax rate is a flat 7.00%, but you’ll almost never pay just 7%. Local counties and cities pile their own taxes on top of that, usually adding another 2.25% to 2.75%.
In most major hubs like Memphis or Nashville, you’re looking at a combined rate of 9.75%.
- Groceries: Most states exempt food. Tennessee does not. While the rate for "food and food ingredients" is lower—currently 4%—you're still paying the local tax on top of that.
- Single Item Rule: There is a weird "single item" tax for big purchases. If you buy a boat or a car, the local tax usually only applies to the first $1,600 or $3,200 of the price, but the state adds an extra 2.75% on the portion between $1,600 and $3,200. It’s a bit of a math headache.
- Prepared Food: Going out to eat? You're paying the full 9.75%. That $100 steak dinner just became $110 before you even tip.
The Business Owner's Reality
If you're moving your company here, you need to know about the "Franchise and Excise" taxes. This is where things get serious for the business crowd.
The Excise Tax is essentially a corporate income tax of 6.5%. If your business makes a profit in Tennessee, the state wants a piece. The Franchise Tax is a bit different; it’s based on the greater of your net worth or the value of real and tangible property you own in the state. The rate is $0.25 per $100 of that value.
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Recent 2024 and 2025 legislative changes actually made this a bit friendlier. For example, they've started offering a $50,000 standard deduction for the excise tax. They also retroactively removed the "property measure" for the franchise tax calculation after some legal pushback, which resulted in a lot of businesses getting refunds. It’s a shifting landscape, but the state is clearly trying to stay "business-friendly" while still keeping the lights on.
Property Taxes: The Hidden Win
If the sales tax is the "bad news," property tax is the "good news."
Compared to the Northeast or the Midwest, Tennessee property taxes are incredibly low. The state doesn't actually collect a property tax—only counties and cities do.
The average effective property tax rate in Tennessee is about 0.64%. To put that in perspective, if you own a $400,000 home, you might only be paying around $2,500 a year in taxes depending on your county. In a place like New Jersey, that same house could cost you $10,000 in taxes annually.
Of course, this varies. Shelby County (Memphis) and Davidson County (Nashville) have higher rates because they provide more services, while rural counties like Fentress or Sevier are significantly cheaper.
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What About the Professional Privilege Tax?
This is a weird one that has been slowly dying. For years, if you were a doctor, lawyer, or lobbyist, you had to pay a $400 annual fee just for the "privilege" of working in Tennessee.
As of 2026, there is a massive push—and pending legislation (HB0189/SB397)—to finally kill this tax for the remaining professions. Most people are already exempt, but if you're an attorney or a physician, you might finally see that $400 fee drop to $0 for tax years ending after May 31, 2026.
The Actionable Bottom Line
So, is Tennessee actually a "low tax" state?
For a high-income family that owns a home and doesn't spend every dime they make, absolutely. The savings on income tax and property tax far outweigh the extra pennies paid at the cash register.
However, if you're a lower-income renter, the tax structure can actually feel more expensive. Since a larger percentage of your income goes toward taxable goods (like groceries and clothes), you end up paying a higher effective tax rate than the millionaires in Belle Meade.
Your Next Steps:
- Run the math: Calculate your current state income tax and compare it to a 9.75% sales tax on your estimated annual spending.
- Check the county: If you're moving, look up the specific property tax rate for the county—don't just look at the state average.
- Account for the "Food Tax": Budget an extra 6-7% for your grocery bills compared to "tax-free" grocery states like Florida or Ohio.
- Business Owners: Consult a local CPA about the $50,000 excise tax deduction to see if you can restructure your filings for 2026.
Tennessee is a great place to keep more of your paycheck, as long as you're prepared for the tax man to meet you at the grocery store instead of the HR office.