Of the nine states that are listed as no-income-tax states, only the state of Tennessee carries with it an asterisk, a footnote that weighs on its ranking, along with the livelihoods of many of the Volunteer State’s retirees, workers and entrepreneurs.
But there is a fire in the belly of some local legislators, possibly akin to a shot of the soon-to-be-released Jack Daniel's Tennessee Fire on a chilly spring evening. They are working to eliminate the only income tax that the state imposes, and they are willing to stand up to fellow Republican legislators and GOP Governor Bill Haslam to get it done.
The stage was set for today’s political battle 80 years ago, when the legislature faced challenges to their effort to expand property taxes to include intangible forms of property. Senator Frank Hall introduced and successfully passed the aptly named Hall Tax: a 5% state tax on earnings from investments in stocks and bonds. Two years later, the law was amended to direct 45% of the revenue raised to local authorities and, a few years later, the tax was raised from 5% to 6%, with the state receiving the full benefit of the increase.
Today, many of those who oppose the elimination of the Hall Tax are the local authorities who benefit from the tax, even though, according to the non-partisan Tax Foundation, the Hall Tax collects less than 1% of local and state revenue. An even more compelling argument for cutting the Hall Tax is that it makes up less than 2% of the state’s annual revenues. This proposal would expand the legislature’s recent cuts to the inheritance tax, sales tax on food, and the state gift tax and would move Tennessee several rungs up on the organization’s State Business Tax Climate Index, to 11th place rather than 15th.
According to this Tennessee Advisory Commission Report, the Hall Tax is extremely volatile, causing real challenges for the state when setting annual budgets and projecting revenues. The report also states that most local governments are not significantly dependent on the tax for government operations.
But, more importantly, tax policy affects real families and their ability to build a sustainable life. This report, published by The Beacon Center, gives real-life examples of how this little-known tax hurts retirees who have selected Tennessee because of it “no-income-tax” claims. The truth is that the Hall Tax penalizes seniors by creating unexpected retirement expenses. For one middle-class couple who has retired to Tennessee and primarily lives off the income of their hard-earned savings and investments, the Hall Tax came as a surprise. They now are finding themselves with the difficult decision of uprooting to a “true” no-income-tax state, such as Florida.
The report also tells the story of a successful Tennessee entrepreneur, Nickolas Holland, who would like to cease collecting a salary from one business while he spends time growing his second business. His choice would be to draw income from his shares of stock from his more stable first company. His plans have been thwarted by the heavy penalty of the Hall Tax.
Tennessee has done much to create an environment that is attractive to, and supportive of, its workers, business owners and retirees. In fact, my own home state of Missouri could learn much from our neighbor to the east. Volunteer State leaders should seriously consider putting an end to this “hidden” tax that penalizes seniors and job-creators and prevents future investors.
