Tennessee is smart to not tax wages. However, the state does have a tax investment income, known as The Hall Tax. Enacted in 1929 by then Tennessee Senator Frank Hall, the Hall Tax imposes a 6% levy on investment income. Senator Mark Green and Representative Charles Sargent have proposed legislation to repeal the Hall Tax and make Tennessee a true no income tax state. With other states, including many in the same region as Tennessee, moving to cut taxes and make their codes more competitive this year, it is important for Volunteer State legislators to make the most of the 2015 session by passing reforms to make the state as attractive as possible to investment, job creation, and retirees looking for a friendly place to settle down. The best way to do so is to get rid of the Hall Tax
Below is a copy of the letter Americans for Tax Reform sent to Tennessee Legislators, urging them to phase out the Hall Tax:
Dear Members of the Tennessee Legislature,
On behalf of Americans for Tax Reform and our supporters across Tennessee, I urge you to use the 2015 session to pass legislation that protects Tennessee taxpayers and fosters economic growth. After being hit with over 20 federal tax increases in recent years, it is imperative that state lawmakers stand up for Tennessee taxpayers.
One piece of legislation that does nothing to help taxpayers at all and should be rejected is Senate Bill 246, which would prohibit beer producers from owning distributorships except under very restricted and temporary circumstances. Legislation like SB 246 represents the classic case of government seeking to pick winners and losers. Passage of SB 246 would stifle investment and damage Tennessee’s reputation as a business-friendly state. The type of government meddling in legitimate private sector business transactions that would result from passage of SB 246 is the sort of thing one would expect to encounter in Illinois or California, not Tennessee. As such, I urge you to reject and vote “no” on SB 246.
A better use of time for lawmakers looking to benefit the state’s economy during the 2015 session is to pass legislation to phase out the six percent tax on dividend income, referred to as the Hall Tax. The non-partisan Tax Foundation released analysis showing how elimination of the Hall Tax would boost Tennessee’s economic competitiveness. Tennessee currently has the 15th best business tax climate in the nation. However, if lawmakers repeal the state’s tax on investment income, Tennessee would have the 11th best business tax climate in the nation.
The Hall Tax does far more damage than it’s worth, raising what amounts to less than one percent of state and local revenue. With average economic growth and modest spending restraint, lawmakers can easily cope with the Hall Tax’s elimination. It’s even more manageable when considering that proposals to eliminate the Hall Tax, such as those put forward by Senator Mark Green and Representative Charles Sargent, phase the tax out over a number of years.
Tax relief isn’t just good politics, it’s good policy. Tax Foundation economist William McBride reviewed academic literature going back three decades and found, “While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions and monetary policy.”
In McBride’s survey of 26 studies dating to 1983, he found “all but three of those studies, and every study in the last 15 years, find a negative effect of taxes on growth.” John Hood, chairman of the John Locke Foundation, found that keeping state and local tax and regulatory burdens as low as possible fosters economic growth when he analyzed 681 peer-reviewed academic journal articles going back to 1990. “Most studies find,” Hood discovered, “that lower levels of taxes and spending, less-intrusive regulation correlate with stronger economic performance.”
Tennessee has lower taxes than most states, but that doesn’t mean lawmakers should rest on their laurels while other states in the region and across the country continue to propose and enact reforms that make their tax codes more competitive. As such, I urge you to use the 2015 session to make Tennessee a true no-income-tax state by beginning to phase out the Hall Tax and to reject onerous regulations, such as those that SB 246 would lead to. Americans for Tax Reform will continue to follow these issues closely throughout session and will be educating your constituents as to how you vote on these important matters. If you have any questions, please contact Patrick Gleason, ATR’s director of state affairs, at (202) 785-0266 or [email protected].