The Role of Local Funding in Tennessee Education: Property Taxes, Sales Taxes, and Fiscal Capacity

By Sky Arnold | Published on June 16, 2025

While state-level funding formulas like the Tennessee Investment in Student Achievement (TISA) Act often dominate headlines, they represent only one side of a crucial partnership. In Tennessee, local governments are mandated partners in financing public education, contributing a significant share of the funds necessary to operate schools. Understanding the sources of this local funding, how the local contribution is determined, and the vital concept of "fiscal capacity" is essential to grasping the complete financial picture of any school district in the state.

For a comprehensive overview of school funding, visit our main guide: Understanding Tennessee School Funding.

A Mandated Partnership: The Local Contribution

Tennessee law requires local governments—counties and, in some cases, cities—to contribute financially to their school districts. This is not an optional investment; it is a required component of the state's public education system. Furthermore, state law includes a "maintenance of effort" provision, which generally prohibits local communities from reducing their local funding contributions from one year to the next, ensuring a stable baseline of local support.

Where Does Local Funding Come From?

Local governments primarily leverage two main sources of revenue to meet their education funding obligations, as outlined in state guidance:

• Property Taxes: A significant portion of the revenue generated from taxes on residential and commercial property is typically allocated to education.
• Sales Taxes: A portion of the local sales tax collected on goods and services also serves as a major funding source for schools.

The combination of these and other local levies forms the pool of money from which a community makes its required contribution to its school district's budget.

What is "Fiscal Capacity"? The Great Equalizer

Perhaps the most important concept in understanding the state and local funding partnership is fiscal capacity. In simple terms, fiscal capacity is a statistical estimate of a county's relative ability to raise revenue for education based on the value of its property and sales tax bases.

The primary purpose of using a fiscal capacity model is to promote equity across the state. It ensures that students in communities with less wealth are not put at a disadvantage. Here’s how it works:

• Districts with **higher fiscal capacity** (i.e., wealthier communities with strong property and sales tax bases) are required to contribute a larger local share to their education funding.
• Districts with **lower fiscal capacity** (i.e., less wealthy communities) receive a larger share of state aid to make up the difference.

This equalization principle was a central feature of the old BEP formula and continues to be a key part of how the local share is calculated under TISA. These complex models are provided by expert bodies like the Tennessee Advisory Commission on Intergovernmental Relations (TACIR) and the University of Tennessee's Center for Business and Economic Research (CBER).

The State vs. Local Share in Practice

While the TISA formula sets an average target of a 70% state and 30% local split for base and weighted funding, the reality is that the actual percentages vary significantly from one district to another precisely because of fiscal capacity. For example, under the old BEP formula, the state's share of funding costs could be as low as 40% in a high-capacity district like Sevier County, while it could be as high as 90% in a lower-capacity district like Union County. This demonstrates the equalization mechanism in action.

Local Funding Often Exceeds the State Mandate

It's important to note that the state funding formula calculates the *minimum* required local contribution. Many school districts and their local governments choose to invest more in their schools than what is officially required by the state. This additional local investment, often called "overmatch," is used to fund programs, staff positions, and services beyond the "basic" level funded by the state formula.

This reality also highlights how critical local economic health is to a school district's budget. As seen in real-world examples, even with the implementation of TISA, local revenue shortfalls combined with rising operational costs can create significant budget challenges that the state formula alone cannot solve. This underscores the fact that TISA is a mechanism for distributing state funds, while local allocations remain dependent on the performance of local property and sales tax revenues.

Conclusion: The Vital Role of Local Investment

While state-level debates about funding formulas capture public attention, the financial health and success of Tennessee's public schools are deeply tied to the commitment and economic vitality of their local communities. The system is designed as a partnership where local property and sales taxes form the foundation of a district's budget. The principle of fiscal capacity works to ensure a degree of equity across the state, but the willingness and ability of a community to invest in its schools beyond the state minimum often makes a significant difference in the opportunities available to its students. Understanding this local role is just as important as understanding the state's TISA formula.

To return to our main guide on school funding, please visit: Understanding Tennessee School Funding.