Date: 11/11/2019
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Repeal of the Halls Tax

Summary

On Friday, May 20, 2016, Tennessee Governor Bill Haslam signed into law a bill that reduces Tennessee's Hall Income Tax from 6 percent to 5 percent for 2016 (tax returns due on April 15, 2017) and eliminates the tax in 2022.  The legislation is House Bill 813/Senate Bill 47 and its sponsors are Senator Mark Green (R-Clarksville) and Representative Charles Sargent (R-Franklin).  The senate voted for the bill with a 29-1 vote.  The only "no" vote was from Senate Minority Leader Lee Harris (D-Memphis).  The House later voted for the bill with a 66-17 vote. The bill was then forwarded to Governor Haslam for his signature on Friday, April 22, 2016. 

The new law contains "legislative intent" to reduce the tax an additional 1 percent per year until fully repealed in 2022.  However, additional reductions for years 2017-2021 will require the passage of additional legislation.  Future legislators can refuse to honor the wishes of the 2016 Legislature and not pass any future rate reductions.  Therefore, the tax rate could, theoretically, remain at 5 percent until January 1, 2022.  However, with Governor Haslam's signature, the tax is eliminated on January 1, 2022 regardless of any future reductions to the tax rate.  Mathematically, a 1 percent reduction per year would eliminate the tax completely by the year 2021, so future legislators will, of necessity, have to be creative with future percentage tax rate reductions.

The repeal of the Hall Income Tax will become the largest tax cut in state history, returning more than $300 million a year to taxpayers when fully implemented.  Accordingly, the intended purpose of annual percentage reductions is to give local governments time to gradually adjust their budgets for the lost revenue, rather than all at once.  The tax generated total revenue of $303.4 million in fiscal year 2015.  Of this amount, $197.9 million was retained by the state and $105.5 million went to the town or city where the taxpayer lived or the county if the taxpayer lived in an unincorporated area.  The top ten recipients in 2015 were:

  1. Nashville-Davidson County - $16.5 million
  2. Memphis - $15 million
  3. Knoxville - $10 million
  4. Brentwood - $4.2 million
  5. Chattanooga - $4.2 million
  6. Franklin - $3.7 million
  7. Knox County - $3.3 million
  8. Germantown - $3.1 million
  9. Belle Meade - $2.1 million
  10. Shelby County - $1.5 million

History and Background

The Hall Income Tax was enacted in 1929 and is named for state Senator Frank Hall of Dickson, TN, who was the sponsor of the legislation.  The tax is only levied on investment income such as dividends from stock, income from investment trusts and mutual funds including capital gain distributions, and interest on bonds.  Income that is exempt from the tax includes interest earned on savings accounts, certificates of deposit, government bonds, credit unions, and bank money market accounts. Dividends from bank stock, insurance companies, and credit unions are also exempt. 

Tennessee is one of two states, the other being New Hampshire, that do not impose an income tax on earned income, or wages and salaries, but impose an income tax on investment income.  Therefore, Tennessee and New Hampshire are often referred to as the "asterisk states" because of the asterisk that always appears by their names in any article, report, or map that reports state income tax rates for all 50 states.  The Nashville-based Beacon Center, an independent tax policy research organization, even calls it the "Asterisk Tax".  Due to the nature of the tax, many in Tennessee do not even know it exists.  Justin Owen, president and chief executive officer of the Beacon Center, stated that their own polling showed that only 17 percent of Tennesseans even knew the tax existed.  In writing online for The Daily Signal, he quips, "It's bad enough when government raids your nest egg, it's even worse when it does it in the dark of night."

When the repeal of the tax takes place in 2022, Tennessee will join only seven other states that do not impose an individual income tax Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.  Tennessee will also be only one of two states to ever repeal an income tax, the other being Alaska in 1980. 

The state Department of Revenue claims that 204,944 Hall income tax returns were filed for tax year 2014, the last year for which full results are available.  The average tax liability per 2014 return was $1,446 but the median was $266, which means that half of the returns had a liability of $266 or less.

The tax does not apply to the first $1,250 of investment income reported on each individual return or the first $2,500 of investment income reported on a jointly filed return.  A person who is legally blind is exempt from the tax and the taxable income that is derived from circumstances resulting in an individual becoming a quadriplegic is exempt.  Any person 65 years of age or older having a total annual income from any and all sources, including social security, below certain limits is exempt.  These limits are, as follows:

Tax Year(s)                   Single Filers                  Joint Filers

2000-2011                        $16,200                         $27,000

2012                                $26,200                         $37,000

2013-2014                        $33,000                         $59,000

2015 and After                 $37,000                         $68,000

Rationale for Repeal

The simple rationale for the repeal of the Hall Income Tax is twofold:  to make Tennessee more economically competitive and to grant financial relief to Tennessee taxpayers.

The Tax Foundation, the nation's leading independent tax policy research organization, projected in 2014 that Tennessee's rank on their State Business Tax Climate Index would improve from 15th to 11th place in the country if the Hall Tax was repealed.  According to Andy Ogles, state director of Americans for Prosperity-Tennessee, Tennessee would move from roughly 14th place to roughly 8th place as an attractive state to which to move or relocate. He says that Tennessee will now be an even more attractive destination for retirees and owners of Subchapter S corporations.  He even cited one specific example of a Subchapter S corporation relocating to Alabama instead of Tennessee simply to avoid paying the Hall Income Tax, meaning 40-50 jobs that could be in Tennessee are now in Alabama. 

Mr. Owen, of the Beacon Center, states that the Hall Income Tax is particularly harmful to retirees, who live on fixed incomes and disproportionately rely on their savings to make ends meet.  He goes on to assert that the tax has, "…driven wealthier residents and retirees out of our state or discouraged them from ever moving here in the first place.  By making Tennessee a haven for hardworking, job-creating residents, we can actually increase other sources of tax revenue.  Those staying in Tennessee or moving here will purchase homes and pay property taxes.  They will purchase cars and other items and pay sales taxes."

Many local governments fear the loss of revenue from the Hall Income Tax.  However, in 2012, the tax only provided 0.9% of Tennessee's state and local tax collection, per the following analysis by The Tax Foundation:

                        General Sales Taxes                42.6%

                        Property Taxes                          25.7%

                        Other Taxes                                 24.6%

                        Corporate Income Tax                6.1%

                        Hall Income Tax                           0.9%

                                                                                 99.9%  

The additional sales and property taxes that will be generated over time, mentioned earlier by Mr. Owen, will go a long way to replace any lost revenue from the repeal of the Hall tax.

One thing both legislators and pundits agree on is that Governor Bill Haslam has led a fiscally responsible state since taking office in January 2011.  He has balanced the budget every year and the total tax cuts during his time in office are approaching $2 billion.  The most significant cuts have come from a full repeal of the state's death and gift taxes, as well as a substantial reduction in the sales tax on food.  He now adds the largest tax cut in state history to his list of fiscal accomplishments.

Conclusion

In an online "Viewpoint" for The Chattanoogan.com, state representatives Dan Howell District 22 and Kevin Brooks-District 24 along with state senators Mike Bell District 9 and Todd Gardenhire District 10, all shared the same perspective that by repealing the Hall Income Tax, "…we are helping preserve the nest eggs of retirees, removing barriers that negatively affect economic growth, inspiring our job creators to take new risks in the market and attracting new companies to our state by showcasing our friendly business environment."

For more information about the Hall Income Tax, please visit the Tennessee Department of Revenue website at https://www.tn.gov/revenue/topic/hall-income-tax.