The debate over Tennessee’s Hall tax has generated several new pieces of legislation that would eliminate, lower, or narrow the scope of this 87-year-old tax on income from investments. Adopted in 1929, the Hall tax requires individuals and other entities receiving interest from bonds, notes, or dividends from stocks to pay a 6 percent income tax.
Several proposals are now being considered in the Tennessee General Assembly to address the Hall tax, but the proposal receiving the most attention is a bill that was introduced by Tennessee state Sen. Mark Green (R-Cheatham County). It calls for a gradual reduction in the Hall tax rate. The rate would fall by 1 percentage point annually until the state has revenue growth of at least 3 percent or until the tax is completely eliminated.
Research shows taxing income stunts economic growth because it takes dollars out of the hands of consumers and businesses, stifling production, innovation, and risk-taking, the main factors driving economic growth. Jackson Taylor of the Beacon Center argues the Hall tax discourages savings and investment, a problem that already plagues many Americans. “The savings rate in America [4.87 percent] is shockingly low when compared to other wealthy countries such as Switzerland and Sweden, who are currently saving at 17.8% and 15.8% respectively. It is absolutely essential that public policy not discourage savings, investment, and ultimately, financial independence; this is exactly what the Hall tax does.”
In a letter to Tennessee legislators calling for support of Green’s bill, Grover Norquist, president of Americans for Tax Reform, wrote, “The six percent Hall Tax on dividend an interest income is a form of double taxation that hurts seniors and discourages investment in Tennessee. A tax on investment income, such as the Hall Tax, is one of the most economically damaging forms of taxation. The Hall Tax is preventing Tennessee from realizing its full growth potential and should be done away with. SB 47 gets rid of the Hall Tax in a responsible and cautious manner, reducing the Hall Tax by a percentage point every year that state revenue growth exceeds three percent. The Hall Tax does far more damage than it’s worth, raising what amounts to less than one percent of state and local revenue.”
One of the main barriers to the repeal of the Hall tax is the effect that decision would have on local government funding. Revenue received from the Hall tax is currently split between state and local governments. According to the Knoxville News Sentinel, the tax brought in $303 million in total revenue in 2015, and $189 million of the Hall tax revenue went to the state’s general fund. The remaining $114 million was distributed to local governments. Several of the proposals now being considered to repeal the Hall tax include measures to ensure funding sent to local governments will not disappear.
One proposed amendment would weaken local governments’ authority to levy a local tax similar to the Hall tax if the state tax is repealed.
Several of the proposals that have been introduced would reduce rates for certain groups of people. For instance, one proposal includes a 1 percent rate cut for veterans with disabilities. Another would cut the Hall tax rate to 5.5 percent for everyone. Some legislators are proposing an increase in the income threshold for those aged 65 and older, and another bill would provide a refund of Hall payments of up to $50,000 each for start-up investors.
Despite claims by proponents of the tax who say it is a tax on the “rich,” many of those who are required to pay this tax are on fixed incomes. According to [Internal Revenue Service] data, 56 percent of Tennessee taxpayers who reported receiving dividends were in households that earned less than $75,000. Proponents of the tax also claim a reduction would have “dire” budgetary consequences, yet the tax brings in only 0.9 percent of the state’s annual revenues.
Studies have consistently shown lowering or completely repealing taxes on income and productivity dramatically improves a state’s economy while generating new jobs. Phasing out the Hall tax would put Tennessee on a sustainable path toward fully eliminating one of the most economically destructive taxes and make the state a more attractive place for entrepreneurs, businesses and high-quality workers to come.
The following articles examine income tax reform from multiple perspectives.
Investing in Tennessee’s Future Begins in Hall Tax Repeal
http://www.beacontn.org/investing-in-tennessees-future-begins-in-hall-tax-repeal/
Jackson Taylor of the Beacon Center examines the proposed repeal of the Hall tax and argues ending the tax “would encourage a higher rate of investment in Tennessee,” writes Taylor. “This would allow more Tennesseans to achieve financial independence throughout retirement, as well as provide the capital necessary to grow our economy and raise the standard of living for all.”
Tennessee Lawmakers Considering Step by Step Elimination of Hall Tax
http://www.atr.org/tennessee-lawmakers-considering-step-step-elimination-hall-tax
Grover Norquist, president of Americans for Tax Reform criticizes the Hall tax and explains why it should be eliminated in a letter to Tennessee lawmakers. The letter says, “After being hit with over 20 federal tax increases in recent years, it is imperative that state lawmakers stand up for Tennessee taxpayers. The best thing lawmakers can do for Tennessee taxpayers and the state economy is pass Senate Bill 47, legislation that will repeal the Hall tax, the state’s six percent tax on investment income.”
Our State, Our Future
http://heartland.org/policy-documents/our-state-our-future
The Beacon Center of Tennessee released this publication as part of its Faces of Freedom series focusing on the harmful impact Tennessee’s investment income tax has on the lives of Tennesseans. The Hall Income Tax empowers the Tennessee General Assembly to “levy a tax on incomes derived from stocks and bonds.” For Tennessee residents, this is a punitive tax which penalizes sound financial planning, subjects individuals to double taxation, hamstrings retirees, and undermines the state’s reputation as an income-tax-free haven.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. These range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
Studies show states without an income tax are more prosperous than those with an income tax. Dr. Richard Vedder compares the 10 states with the highest increase in income tax burden over a 40-year period to the 10 states with the lowest increase in income tax burden (or no increase, in the case of states that did not have an income tax). Over the 40-year period, real total income growth for the top 10 income-tax-raising states was 191 percent, whereas real total income growth for the states with the lowest or no increases in the state income tax was 455 percent.
Hall Tax Repeal Would Improve Tennessee Business Tax Climate
http://taxfoundation.org/blog/hall-tax-repeal-would-improve-tennessee-business-tax-climate
Tennessee legislators are currently considering several bills which would eliminate or draw down the state’s tax on interest and dividend income. The Tax Foundation argues the Hall tax is a superfluous burden in a state with an otherwise well-structured code.
States Continue to Chip Away at Income Taxes in 2014
http://www.forbes.com/sites/patrickgleason/2014/02/12/tn-hall-tax/
Never in history have states competed so doggedly for investment and job creation through fiscal policy. Today, even states which are relatively low-tax and well-governed can’t just sit back and rest on their laurels. This dynamic is on display this year in Tennessee, one of the nine no-income-tax states in the nation. Although no-income-tax states have a fiscal and marketing advantage in attracting employers and investment, Tennessee is forced to put an asterisk beside its name on that list. Though it does not tax wage income, the Volunteer State does levy a tax on investment income, including dividends and interest.
Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
Many economists consider income taxes to be the most destructive taxes, stunting economic growth by taking dollars away from consumers and businesses and stifling production, innovation, and risk-taking, which are the main factors driving economic growth. High personal and corporate income taxes deter economic development, discourage new businesses and high-income earners from moving into a new market, and encourage current businesses to leave. High taxes also discourage investors from bringing new capital into a state. Recent studies demonstrate states with no income tax or with lower income taxes relative to neighboring states have performed better economically and enjoyed greater job and population growth than those with higher taxes.
State Income Taxes and Economic Growth
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth-0
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. They used regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004. The analysis reveals higher marginal tax rates impose significant damage on economic growth.
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth edition of this publication from the American Legislative Exchange Council and authors Arthur Laffer, Stephen Moore, and Jonathan Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.
John Nothdurft joined the staff of The Heartland Institute in May 2008 and left in January of 2019.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
