Updated: Apr 25, 2022
Increased Gas, Registration Levies Offset by Cuts in Non-Gas Taxes; Local TN Govts Gain Surcharge Referendum Option to Fund Transit
Following weeks of negotiations, political posturing and legislative maneuvering, Governor Bill Haslam on April 26 signed into law the first major update to Tennessee’s road-funding program in over 25 years.
Coupling modest increases in the state’s fuel taxes and annual registration fees with four significant tax cuts, the enacted version of the IMPROVE Act paves the way for accelerated work on a backlog of over $10 billion in much-needed improvements to state highway routes and bridges—and provides new transportation revenue and options to Tennessee’s local governments.
“Efficiently moving goods and people within and through our state is an economic imperative for Tennessee, and is critical to supporting new and expanding business investments as well as the Tennesseans who bring our economy to life,” said TBR Chair Margaret O. Dolan (LocalShares Knowledge, LLC, Nashville). “The passage of the IMPROVE Act will help Tennessee remain one of the best places in the nation in which to live and do business.”
Once phased in, the IMPROVE Act’s revenue-raisers will yield an estimated additional $350 million per year, of which $245 million will go to state projects while $70 million and $35 million in new funding will be shared with Tennessee counties and cities, respectively. Without the new funding, state officials estimated it would have taken until at least the year 2037 to build all of the 962 backlogged projects outlined in the IMPROVE Act, which were previously authorized but lacked funding. “With the passage of the IMPROVE Act,” said TN Dept. of Transportation spokesman Mark Nagi, “we’re looking to have all of those projects either complete, under construction, or under contract within the next 13-14 years.”
For Tennesseans, the new law largely offsets its “user-based” tax and fee increases by cutting a projected $400 million per year in taxes on groceries, dividend and investment income, manufacturers’ property and payroll and income, and disabled veterans’ real property. Lt. Gov. Randy McNally hailed enactment of the IMPROVE Act as “a victory on all fronts—for taxpayers, for economic development and for the continued mobility and safety of our citizens,” adding that “tax cuts result in more money in the pockets of our citizens and more entrepreneurism in our state.”
The IMPROVE Act also breaks new ground in a policy area that’s increasingly important to Tennessee’s most-populated and highly-congested localities: public transit. Subject to approval by local citizens via referendum, the new law allows local governments to impose surcharges on existing local option taxes (such as the local sales tax) to fund the construction of transit projects within their jurisdictions. “The IMPROVE Act empowers Tennessee’s most populous counties to create local, dedicated funding for transit through a voter referendum,” says Ralph Schulz, head of TBR-member Nashville Chamber. “That’s a game-changer for those counties, their residents, and for our state’s economy.”
The IMPROVE Act raises gasoline taxes by 6 cents per gallon and diesel taxes by 10 cents per gallon over the next three years. Additionally, state vehicle registration fees will see increases starting at $5/year for cars, and electric cars—which use state roads but don’t contribute gas taxes to fund them—will be subject to a new annual fee of $100. Existing state levies on alternative vehicle fuels such as compressed natural gas will also increase slightly, to maintain parity with the new levies on traditional fuels.
On the tax-cut side, sales tax on groceries will be decreased by 20%, from 5% to 4%. Additionally, manufacturers in Tennessee that also have operations in other states will gain the option to apportion their franchise & excise tax liability using “single sales factor”, instead of having to count their Tennessee property and payrolls in figuring their main corporate taxes in our state. The IMPROVE Act also accelerates the phase-out of the Hall tax on personal income derived from dividends and investments, and at the insistence of the Tennessee Senate, disabled veterans will receive additional property tax relief.
According to a study released in April by The Road Improvement Program (TRIP), a nonprofit national transportation research group, the poor condition of Tennessee’s roads and bridges costs motorists $6 billion per year in vehicle repairs, depreciation of value, tire wear, and accidents. As for economic development, the Federal Highway Administration estimates an ROI of $5.20 for every dollar spent on road and bridge project improvements in reduced maintenance costs and emissions, fewer delays and accidents, and less fuel consumption.
Click here to see how members of the Tennessee General Assembly voted on final passage of the IMPROVE Act.