July 2016

Tennessee – On the Road to Income Tax Freedom

By Amy K. Frantz

In the March Tax Education Foundation Brief, How Iowa Compares, I wrote that “Iowa is one of 43 states that require citizens to pay an income tax. Two of those states, New Hampshire and Tennessee, tax only interest and dividend income, not wage and salary income.”[1]  Now, however, Tennessee is on the road to joining the seven states that have no income tax, by adopting legislation to phase out that state’s tax on interest and dividend income.

Tennessee’s tax on interest and dividend income is known as the Hall Tax. “The Hall income tax is imposed only on individuals and other entities receiving interest from bonds and notes and dividends from stock.  It was enacted in 1929 and was originally called the Hall income tax for … Senator [Frank Hall] who sponsored the legislation.”[2]

Earlier this year, the Tennessee Legislature passed and Governor Bill Haslam signed into law a bill that “reduces Hall income tax from six percent to five percent; expresses legislative intent that the tax be statutorily reduced by one percent annually beginning with the first annual session of the 110th general assembly; [and] eliminates the tax for tax years beginning on or after January 1, 2022.”[3]  The bill received bipartisan support; “the final bill passed the House 66-17 and the Senate 29-1.”[4]

The lengthy repeal, which won’t be complete until 2022, was chosen to allow the state and local governments time to adjust to the change in tax law. “Under present law, 5/8 of the revenue collected by the Hall income tax is distributed to the general fund and the remaining 3/8 of revenue is distributed to the local government from which the tax was collected.”[5]  Because Tennessee’s income tax is less broad than most states that tax income, “the Hall Tax generates [only] 1.3 percent of state and local tax revenue in Tennessee.”  However, this did not stop local officials from bemoaning the calamity that will befall them with the repeal of the Hall Tax, threatening that they “will ‘have to either increase property tax or cut services or both.’”[6]

Supporters of the bill, however, believe that Tennessee citizens will benefit from the repeal of the Hall Tax. Raul Lopez, Executive Director of Latinos for Tennessee, states that “more than half of the people who are paying this punitive tax make less than $75,000 a year…those paying for the Hall Tax include retirees, hardworking families, and budding entrepreneurs who call the Volunteer State home.”[7]

Tennessee Senator Mark Green, the sponsor of the bill to repeal the Hall Tax, “says reducing the cost of investing in Tennessee businesses will bring greater economic prosperity to the state.”[8]  Senator Green explains, “Imagine you are an entrepreneur on Shark Tank and Mark Cuban decides to invest $300,000 in your company…As an investor, he will tell you to avoid Tennessee, because he doesn’t want to have to pay 6 percent to Tennessee.  So we get more startups in Tennessee with it gone.”[9]

Senator Green also decries the lack of angel investors in Tennessee because of the tax. “There are only 400 angel investors in Tennessee…A comparably sized state with no Hall tax has 12 times as many, meaning access to startup capital in very light in Tennessee.”[10]

We will be watching the state of Tennessee, both to see if future Legislatures and Governors keep the promise to reduce and repeal the Hall Tax, and to see if the state prospers when the tax on interest and dividend income is eliminated.

Amy K. Frantz is Vice President of Public Interest Institute.

The views expressed herein are those of the author and not necessarily those of Public Interest Institute or Tax Education Foundation.  They are brought to you in the interest of a better-informed citizenry.

[1] Amy K. Frantz, “How Iowa Compares,” Tax Education Foundation Brief, March 2016, <http://www.taxeducationfoundation.org/tax-education-briefs-archive/march-2016/> accessed June 27, 2016.

[2] “Hall Income Tax – Overview,” Tennessee Department of Revenue, <https://www.tn.gov/revenue/topic/hall-income-tax> accessed June 27, 2016.

[3] “SB 0047,” Tennessee General Assembly – Legislation, <http://wapp.capitol.tn.gov/apps/BillInfo/Default.aspx?BillNumber=SB0047> accessed June 16, 2016.

[4] Richard Locker, “Gov. Bill Haslam signs Hall income tax cut, repeal into law,” The Tennessean, May 20, 2016, <http://www.tennessean.com/story/news/politics/2016/05/20/gov-bill-haslam-signs-hall-income-tax-cut-repeal-into-law/84044810/> accessed June 16, 2016.

[5] “SB0047.”

[6] Dylan Grundman, “What Just Happened in Tennessee? Questions and Answers,” Tax Justice Blog, Citizens for Tax Justice and the Institute on Taxation and Economic Policy, May 31, 2016, <http://www.taxjusticeblog.org/archive/2016/05/what_just_happened_in_tennesse.php> accessed June 16, 2016.

[7] Raul Lopez, “Repeal of Hall Tax will bolster Tennessee’s economy,” The Tennessean, May 17, 2016, <http://www.tennessean.com/story/opinion/contributors/2016/05/15/repeal-hall-tax-bolster-tennessees-economy/84284304/> accessed June 29, 2016.

[8] Ben Johnson, “Tennessee Shuts Door on Its Only Income Tax,” Budget & Tax News, The Heartland Institute, July 2016, pp. 1 and 12.

[9] Ibid.

[10] Ibid.