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April 2021 marks the first time in more than 90 years that no Tennesseans will have to pay state tax on their investment income. Payment of that levy, referred to for nine decades as the Hall Tax, would’ve been due this month, but that is no longer the case thanks to the enactment of a 2016 bill that phased out the 6% tax on dividend and interest income. 

The multi-year phaseout of the Hall Tax was completed at the end of 2020 and with its full repeal, Tennessee became the nation’s eighth true no-income-tax state. Governors and lawmakers in state capitals across the U.S. are now advancing legislation to follow Tennessee’s lead, and for good reason. 

Other Look To Tennessee As A Model For Sound Fiscal Policy

Lawmakers in New Hampshire are now looking to follow Tennessee’s lead in becoming a true no-income-tax state. As was the case in Tennessee for nearly a century, New Hampshire does not tax wage income but does tax investment income. However, legislation has been introduced that if passed,  would allow New Hampshire to lose its asterisk like Tennessee did at the beginning of 2021 and become the ninth true no-income-tax state. 

Additionally, lawmakers in West Virginia, Mississippi, Arizona, and North Dakota have introduced legislation this year to become no-income-tax states like Tennessee. In North Carolina, where lawmakers have chopped down the state income tax by nearly a third over the past decade, lawmakers recently introduced a bill to further chip away at their income tax, taking it from 5.25% to 4.99%, with the ultimate goal being to phase the tax out completely once they have a governor who shares that goal. 

More and more state policymakers across the country want to vote on bills to phase out state income taxes, in part, because they’ve seen how Americans have been voting with their feet in favor of states like Tennessee that do not tax income. According to IRS migration data, more than 3.1 million Americans on net moved into no-income-tax states between 2011 and 2018, taking more than $235 billion in annual income with them. 

Not only are policymakers in other states learning from Tennessee about the benefits that come with having no state income tax, but the Volunteer State has taught other states much about the best approach to becoming a no-income-tax state and maintaining that status. Tennessee, like North Carolina, has shown other states that a gradual, phased approach over a number of years is the best method for reducing and eliminating income taxes. Lopping off too much at once can lead to unexpected budget shortfalls that can force unnecessary and painful adjustments. By phasing out the Hall Tax over nearly half a decade, Tennessee lawmakers ensured that local budgets, which depended on Hall Tax revenue to varying degrees, were able to plan for the reduction in revenue. 

In addition to showing the nation that a gradual, multi-year approach is the optimal way to phase out income taxes, Tennessee has also demonstrated why it’s smart to lock in taxpayer safeguards to ensure this progress cannot be easily undone by future legislatures. Thanks to the General Assembly’s successful initiative to put an income tax prohibition in the state constitution, which was approved by Tennessee voters in 2014, individuals, families, employers, and investors can come to Tennessee with the confidence that a state income tax won’t be imposed on them.

Imitation is the highest form of flattery, so the saying goes, and Tennessee should feel flattered. Texas lawmakers thought the income tax prohibition adopted in Tennessee was such a fantastic idea that they enacted one in the Lone Star State in 2019. Texans have known since the days of Sam Houston that good people and ideas come out of Tennessee. If an economic powerhouse like Texas is copying Tennessee, it’s a good sign for Tennessee lawmakers that they’re doing the right thing. 

Lawmakers in states like California, New York, and Illinois continue to serve as ongoing examples of how not to govern. In contrast, states like Florida, Texas, North Carolina, and particularly Tennessee, which this year became the first state to eliminate an income tax since Alaska in 1980, are fortunately there to serve as a national model for sound governance.