Tennessee is projected to make strong revenue gains, but experts say there’s a catch

Economists are projecting that tax collections in Tennessee will continue to be strong, at least for the rest of this fiscal year.

State finance officials will soon be setting their expectations for the year after that. And what they predict will determine how much lawmakers have to spend.

After a year and a half in the pandemic, most economists told the state funding board this week that this fiscal year will finish up with around 8% to 9% revenue growth. They say that tax revenues will continue to grow in the next fiscal year, which begins in July 2022, but the growth will be much more modest — somewhere around 2% to 4.5% percent. 

But they couched those optimistic projections, saying a lot is still unknown.

University of Tennessee economist William Fox told the board, “We’re trying to forecast in a window that none of us have ever seen.”

University and state economists cited a variety of reasons for that uncertainty. Tennessee still has tens of thousands fewer workers compared to when the pandemic began. And in a state where most taxes depend on consumer spending, it’s unclear how long people will keep buying expensive items like cars, furniture and home renovations. 

Most economists agree that supply chain issues are likely a short-term problem, but perhaps the most critical unknown is how long the rapid increase in inflation will last. 

Many of the experts advised moving forward with caution.

“Less certainty, in my opinion, calls for conservatism,” said Comptroller of the Treasury Jason Mumpower.

Based on the conservative estimates the State Funding Board adopted in November 2020, Tennessee has already outperformed its budget by more than $900 million in the first three months of this fiscal year.

The state will finalize the revenue estimates for fiscal year 2022-2023 next week.