Tennessee is often identified as one of the nine U.S. states without an income tax. Although it is true Tennessee does not tax income derived from wages, it does levy a tax on income from investments – known as the Hall Tax. Adopted in 1929, the Hall Tax is a 6 percent income tax on individuals and other entities receiving interest from bonds, notes, and dividends from stock.
A proposal by Tennessee state Sen. Mark Green (R-Cheatham County) calls for a gradual reduction in the Hall Tax rate by 1 percentage point each year from the current 6 percent every year the state has revenue growth of 3 percent or more until the tax is completely eliminated. Taxing income stunts economic growth by taking dollars out of the hands of consumers and businesses and stifling production, innovation, and risk-taking, the main factors driving economic growth.
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.”
Despite claims by proponents of the tax that it is a tax on the “rich,” many of those who are required to pay this tax are on fixed incomes. According to IRS 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.
Tennessee Lawmakers Considering Step by Step Elimination of 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
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 that 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
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
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
Tennessee legislators are currently considering several bills that 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
Never in history have states competed so doggedly for investment and job creation through fiscal policy. Today, even states that 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
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
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
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.
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