(The Center Square) – A month before Tennessee lawmakers return to Nashville and hear Gov. Bill Lee's budget proposal in January, both sides of the aisle agree it will be a tight year for state budget writers.
The State Funding Board is predicting modest growth of just over 2.3%. During Lee's budget hearings last month, departments submitted $1.3 billion in requests for new funding.
Sen. Bo Watson, R-Hixson, chairs the Senate Finance, Ways and Means Committee. Lawmakers will deal with the inflationary pressures coming from the education and health care sectors that occur every year, he said. But the fiscal year 2026 budget will present some new challenges.
"In some ways, while people feel like the economy is slowing down, it's really more of the federal dollars that we had in the budget from the COVID funding – all of that money is starting to disappear and state budgets are now returning to a more normal growth pattern," Watson said in an interview with TCS.
Sen. Jeff Yarbro, D-Nashville, agrees that a slowing economy and federal cuts will pose challenges to state budget writers.
"The needs just keep piling up," Yarbro said in an interview with TCS. "You've got the general growth coming and most of what the increases are are just dealing with how much more expensive it is for government to do business right now. Even this budget, with all the needs we are talking about doesn't account for a lot of the federal cuts we are seeing made to education. Tennessee is going to be in worse shape because health care is going to be more expensive, childcare is going to be more expensive. We're putting less into education."
Yarbro also attributes the tight budget to large corporate tax cuts approved by the General Assembly in 2024. Also, House Speaker Cameron Sexton and Lee are discussing doubling the Education Freedom Scholarships, dubbed school vouchers by some.
"The voucher dollars, the expansion that speaker and governor have been talking about is doubling the size of this brand new program so that at the very least it would be a $300 million line item for the state and would be one that would continue growing into the future where it's going to be a billion problem for the state," Yarbro said.
Watson said the Education Freedom Scholarships are one thing the Legislature will have to discuss. The law allows the state to add 5,000 more scholarships to the current 20,000 without legislative action. Adding 20,000 scholarships would require about $145 million in recurring funds, according to Watson.
"One of the things we committed to with growing educational freedom scholarships was that we would not put our state budget in peril in doing that," Watson said. "So that's part of the budgetary discussion that we will have."
The word "affordability" is the buzzword not only in political campaigns, but it's also on the minds of lawmakers.
Almost 643,000 Tennesseans have insurance through the Affordable Care Act, according to a report from the Sycamore Institute. If Congress lets COVID-era subsidies expire this week, between 142,000 and 203,000 could choose to go without health insurance, the report said.
It's another cut to federal services that Tennesseans are experiencing, even as lawmakers cut items like corporate taxes, according to Yarbro.
"As Tennesseans, they haven't seen a cent of that tax relief but they are seeing the cuts and they're feeling the cuts," Yarbo said. "And right now, as far as we can tell from the budget hearings, not proposing to do anything meaningful about those cuts that people are facing or about the affordability that almost everybody in our economy is dealing with."
Last year, Democrats and Republicans introduced bills to eliminate the state grocery tax, which Watson calls the most stable and reliable tax the state collects. Both failed.
"I think on a statewide level, there will be a statewide discussion around the grocery tax and whether it can be reduced or eliminated," Watson said. "We still have some other taxes out there that we have discussed eliminating like the professional privilege tax has long been on the Republican agenda to try and eliminated."
The 2026 session of the General Assembly begins on Jan. 13.
