Growing pains influencing Tennessee economic outlook

By KATE COIL

TT&C Assistant Editor

While “all growth is good growth” has long been Tennessee’s mantra when it comes to the economy, perspectives are changing toward a more managed approach with deep implications for municipalities. 

Dr. Marianne Wanamaker, dean of the University of Tennessee’s Howard Baker School of Public Policy and Public Affairs and professor of economics, discussed the trajectory of Tennessee’s economy at the recent Tennessee Municipal League Conference and Expo. 

Towns and cities are constantly facing emerging issues like data centers and population changes while trying to balance  a desire for low tax rates with the stress on infrastructure that increased people and needs create. 

Wanamaker said Tennessee’s approach to population growth and the economy has changed rapidly in the last five years alone. 

“We were coming out of COVID, and we were all delighted to be the destination for other Americans,” Wanamaker said. “People were picking up and leaving states like Illinois, New York, and California, and moving to Tennessee. We were really proud. Five years later, the mood in the room is different.” 

Wanamaker said higher housing prices, additional traffic, and expansion into previously rural areas have changed Tennessean’s perspective on growth being generally positive to something state and local leaders need to manage.  

HOW WE GOT HERE 

Many of the reasons new companies and people have moved to Tennessee are the same factors that are now putting strain on public infrastructure and fostering concerns that development is happening in ways that are not beneficial to local communities.  

“Our external posture is friendly to people – which looks like no income tax – and we are friendly to business – which looks like low land prices and low energy prices,” she said. “Our tax system matches these preferences, and our tax system – especially at the local level – is about growth in the number of people and growth in property. That drives our tax revenues. But if that’s the case, then planning is king.” 

Since 2025, Tennessee’s gross domestic product (GDP) has outperformed the average U.S. rate. That trend largely emerged following the pandemic. 

“Tennesseans are an ungovernable people, so public health officials asked us to do things we didn’t want to do and didn’t do,” Wanamaker said. “The tradeoff is a lot of people died in Tennessee, but on the other hand, our economy came out of COVID growing a lot faster than a lot other places in the country. Tennessee, in the last five years, has grown at 3.2% per year, which is really fast.”  

WHERE GROWTH COMES FROM 

There are only two ways in which a state’s economy can grow: either the workforce increases or the amount of workers in the state remains the same but that existing workforce increases its output. Tennessee’s growth is fueled by the increase of its workforce population. In the past 20 years, Wanamaker said the U.S. population grew about .75% per year with Tennessee reporting a 1% population increase per year.  

Twenty years ago, natural population – the state having more births than deaths – was driving the state’s population increase, but that’s not common anymore.  Since the pandemic in particular, most of the state’s surge has been driven by in-bound migration. 

“Even that is changing,” Wanamaker said. “Ten years ago, that migration was mainly fueled by domestic migration – people coming from other states. International immigration also boomed during that period. We were a major destination for international immigration before the current presidential administration. There has been a falloff in our ability to replace ourselves, but there has been a big migration of people from other states.” 

Population expansion in Tennessee is also more widespread than it was 10 years ago, changing from mainly urban centers to some of the more rural parts of the state. Middle and East Tennessee still lead population growth in the state. Additionally, 75% of the state’s new residents are under the age of 55.  

On the national level, the U.S. population is in a long-term decline with the amount of births below the level needed to cover the number of deaths. The Congressional Budget Office (CBO) expects the country’s natural population growth to be in the negative by 2030. While some states may continue to see positive natural population increases, Tennessee is expected to follow the national trend of decline.  

Without migration from outside the U.S., the CBO foresees the U.S. population could begin to shrink by 0.3% per year. The office has also projected that about 1 million immigrants to the U.S. are needed each year through 2050 to offset the natural population loss.  

The U.S. is also facing what is known as the demographic cliff – meaning that fewer babies being born is already beginning reflected in the numbers of students graduating from high school, which has consequences for higher education and school districts.  

“This means there are going to be smaller schools that are on the verge of becoming insolvent,” she said. “In Tennessee, we have been saved by in-bound migration. Tennessee expects to have an increase in the number of high school graduates relative to what we had in 2030, compared to most states where  that number is declining. Tennessee is one of only ten states that is in the positive.”  

Just because Tennessee is expected to have a higher number of high school graduates doesn’t mean that those graduates will stay in the state, however. Wanamaker said universities in states surrounding Tennessee have increased their attempts to recruit Tennessee high school graduates  because they don’t have enough to fill their flagship universities.  

“The question is -- are we going to invest in trying to keep our 18-year-olds in the state or hope they come back,” Wanamaker said.  

TAXATION AND REVENUE 

Tennessee’s current tax system is set to benefit most from property improvements and a rise in population rather than from growth in workforce productivity. 

“We have the second-highest reliance on sales tax in the country, no income tax, and low and declining corporate taxes,” Wanamaker said. “At the county level, 15% of revenues come from property taxes, and the automatic rate we set means you actually have to make an effort to raise the rate on property taxes. The local revenues on state-shared sales taxes is divided up and distributed back to the counties by population.” 

While Wanamaker said she is not advocating Tennessee implement an income tax, she does think we should consider the impact this lack of income tax has on the state’s tax system as a whole.  

In a scenario where everyone in a state’s population increases productivity by 5% and sees a salary increase of 5% as a result, a state with income tax will capture that 5% increase. In states like Tennessee with no income tax, however, a 5% increase in productivity and income is only captured in the amount of sales tax dollars those residents then chose to spend in the state. Wanamaker said statistically, the more money people make, the more than tend to save rather than spend.  

“We have a tax system that incentivizes the more people type of growth over the more productivity type of growth,” Wanamaker said. “The same thing is true on property taxes. You don’t get more on property taxes if the people in the building get smarter or more productive. You only get more property tax if there is new businesses or a new house. This helps us frame the difficulties we are facing now around growth. Our tax structure has an interest in population growth.” 

INCREASING NEEDS 

As part of the state’s narrative shift on advancement and planning, Wanamaker said that municipalities are concerned about issues including: 

• Data centers 
• Utility rates and how utilities are managed 
• Housing affordability 
• Solar energy siting 
• TVA gas and power plant siting 
• State property taxes 
• Toll and choice lanes 
• School funding 
• Local capacity and maintenance 

A recent study by the Baker Center that was commissioned by the Tennessee Business Leadership Council found the state’s energy landscape is changing as electricity demand accelerates.  

“Part of what we are struggling with is that in this new energy world we haven’t had to worry about load growth in 10 years because it’s been flat,” she said. “It’s been flat because we’ve adopted electricity-saving technologies and efficiencies all over the place. That has allowed us to continue to grow without adding electricity assets. Those days are over.” 

While some Tennesseans feel that data center development will fuel the economy, others are skeptical about the consequences they might bring. Tennessee has some of the cheapest industrial electrical prices, which has helped fuel business expansion - particularly businesses that consume large amounts of energy like data centers.  

“It should not be a surprise to us that data centers want to land in Tennessee, because big industrial complexes that use a lot of energy have long been located in Tennessee,’ Wanamaker said. “The South is the No. 1 destination nationally for active and planned data centers, and Tennessee is ranked the most data center-friendly state. We are sort of sitting ducks on this; we set ourselves up. Much like our lack of income tax has attracted people to move, our low electricity costs are attracting data centers.” 

With these concerns, many Tennesseans are expressing a desire for thoughtful, future-thinking planning from their local governments.  

“We designed our system for growth,” Wanamaker said. “Even if we live in a rural area, our tax system promotes growth and depends on more people and more property. There is no city – big or small, urban or rural – that is different because our fiscal system is the same. There are tradeoffs. If you don’t want school consolidation, you have to be happy with growth and build the growth we want – at that under-18 level, not just retirees. You can get a lot of people to the table on housing affordability if you say your kid can’t afford a house in the neighborhood they grew up in. We need to find the equivalent for growth.”