Repeal Hall Tax, make Tennessee truly income tax-free

March 27, 2015 9:42AM

The original piece ran in the Tennessean. Tennessee Gov. Bill Haslam, the new chairman of the Republican Governors Association, has expressed support in the past for repealing his state’s tax on stocks and bonds, referred to as the Hall Income Tax. Yet, legislation to phase out the tax failed to pass last year, in large part due to concerns among the governor’s administration about lost revenue. Anticipating these apprehensions, legislative leaders are moving forward with a new bill in 2015 to repeal the tax on investment income in a responsible manner that addresses revenue concerns. As a result, Gov. Haslam now has a chance to become the chief proponent of the repeal effort that would make Tennessee a true no-income-tax state. Tennessee may claim to be income tax-free, but the fact is, anyone who has a retirement account made up of stocks and bonds would beg to differ. The Hall Income Tax imposes a significant 6 percent tax on the dividend income earned by these Tennesseans, with minor exemptions. This predominantly harms middle-class senior citizens, proven by the fact that more than 40 percent of those who pay the tax make less than $75,000 a year. The tax brings in around $260 million a year, which amounts to less than 1 percent of state and local revenue. The tax also deters business owners and retirees from moving into Tennessee. Migration trends show that Americans are fleeing income-tax states in droves. While Tennessee would otherwise be a magnet for these hardworking, job-creating, taxpaying citizens, many shun the Volunteer State for greener pastures because of the Hall Tax. Repealing the tax would encourage individuals, families, retirees and entrepreneurs alike to relocate here, bringing their tax revenue with them. In this sense, the money brought in by those moving into our state and buying houses, cars and other items — and paying property, sales and similar taxes as a result — would help offset the lost revenue on the front end. The rest of the gap could easily be filled by corresponding cuts in spending, which would not be hard to find. From failed programs, multimillion-dollar handouts to politically connected corporations and downright waste, fraud and abuse, there is plenty of fat to trim from the state budget. That’s the easy part. Sen. Mark Green and Rep. Charles Sargent have proposed a common-sense, fiscally responsible solution that adequately addresses Gov. Haslam’s concerns. Their proposal, supported by the Beacon Center and Americans for Tax Reform, would phase the tax out over a period of no fewer than six years. During that time, the state could responsibly put spending in line with revenue, and local governments could plan for the future. Only when state revenues increased by 3 percent per year would the next step of the phase-out occur, one percentage point at a time until the tax is gone. If government’s coffers grow by 3 percent in one year, it’s taxing too much. It needs to return that money to taxpayers rather than squander it away on unnecessary political pet projects. Gov. Haslam has proven to be a fiscally responsible tax-cutter during his first term in office. Now in his second term, Gov. Haslam has the opportunity to become an example for other governors to follow. He can lead the charge to repeal the Hall Tax, returning Tennesseans’ hard-earned money to their pockets, making the Volunteer State attractive to relocating investors and retirees, and he can do so in a way that is financially sound. With his leadership, Tennessee can become income tax-free once and for all, and the envy of every other state as it becomes the most free and prosperous state in the nation. Justin Owen is president and CEO of the Beacon Center of Tennessee, the state’s premier free market think tank. Patrick Gleason is state director of Americans for Tax Reform and a senior fellow with the Beacon Center.