Tennessee Becomes Only Second State Ever To Eliminate Its Income Tax

Justin Owen President, The Beacon Center of Tennessee
Font Size:

Just before the Tennessee General Assembly adjourned for the year, we made tax history. With the repeal of the Hall Income Tax on stocks and bonds, Tennessee became only the second state in history to eliminate an income tax. And it’s been a long time coming. The only other state to eliminate an income tax was Alaska — and that was more than three decades ago.

Tennessee has long lauded itself as an income tax-free state, but that claim always came with an infamous asterisk. Although the state does not tax income from labor, it has levied a six percent tax on investment income since the establishment of the Hall Tax in 1929. This tax is particularly harmful to retirees, who live on fixed incomes and disproportionately rely on their savings to make ends meet. It also drives investors and job creators to greener pastures like Florida and Texas, states that have an asterisk-free income tax reputation.

Over the past several months, the Beacon Center, Tennessee’s free market think tank, and other conservative groups staged an all-out siege to repeal the Hall Tax. Together, we made the case that the Hall Tax was not the Tennessee way of rewarding hard work, savings, and frugal planning.

On the last days of session, Rep. Billy Spivey (R-Lewisburg) filed an amendment that made the legislature’s intent to phase out the Hall Tax a statuary commitment. Under the leadership of Sen. Mark Green (R-Clarksville) and Rep. Charles Sargent (R-Franklin), lawmakers enacted a six-year phase out of the Hall Income Tax. The bill now awaits Gov. Haslam’s signature.

While the governor has not made his intentions known about whether he will sign the Hall Tax repeal, ushering it into law would be consistent with his values and his previous leadership. Since entering office in 2011, Gov. Haslam has led a fiscally responsible state, balancing the state budget while returning money back to taxpayers’ pockets. The total tax cuts during his tenure are nearing $2 billion. The most meaningful cuts have come from a full repeal of the state’s death and gift taxes, as well as a significant reduction in the sales tax on food.

The Hall Tax phase out will complement these actions well, returning more than $300 million a year to taxpayers. While this lost revenue will make little impact on the state budget — the Hall Tax accounts for less than two percent of state revenue — it will make a huge difference in the lives of the Tennesseans who currently pay the tax. More than half of those who pay it make less than $75,000 a year. Freeing them of the burden imposed by the Hall Tax represents a huge weight off their shoulders.

It is also true that eliminating taxes like this does not lead to a dollar-for-dollar reduction in revenue. Just like with Tennessee’s death tax, the Hall 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. Thus, both the state and local governments stand to benefit from the repeal of the Hall Tax, while all Tennesseans will reap the rewards of the increased investments in our state.

For these reasons, Gov. Haslam should continue his leadership that has made Tennessee a state of fiscal responsibility and limited government by signing the Hall Tax phase out into law when it reaches his desk.

Justin Owen is president and CEO of the Beacon Center of Tennessee, the state’s premier free market think tank. Visit Beacon online at www.BeaconTN.org.