Tennessee on the Road to Becoming Income Tax-Free

By Published on May 4, 2016

Many people already think Tennessee is one of only a handful of states with no income tax, but as middle-class retirees can attest, it is anything but.

While the state does not tax income from labor, it has levied a 6 percent tax on investment income since the establishment of the Hall Income Tax in 1929. Because retirees live on fixed incomes and disproportionately rely on their savings to make ends meet, this is effectively a nest egg tax. It also drives investors and job creators to states like Florida and Texas, which impose no income tax of any kind.

Sadly, many people are unaware of this harmful tax. It isn’t until they start withdrawing their savings to pay for retirement that they are caught by surprise. In fact, our own polling showed that only 17 percent of Tennesseans even knew the tax existed. It’s bad enough when government raids your nest egg; it’s even worse when it does it in the dark of night.

We should reward hard work, saving and frugal planning. Because of this, the Beacon Center — Tennessee’s free market think tank — and other conservative groups, such as Americans for Prosperity, made it our top priority to repeal the Hall Tax during the 2016 legislative session. Together, we made the case that the Hall Tax was not the Tennessee way.

Fortunately for taxpayers, our efforts succeeded. On the last day of the legislative session, state lawmakers enacted a six-year phaseout of the tax. The bill now awaits Gov. Bill Haslam’s signature.

With the elimination of the Hall Tax, Tennessee will become only the second state in history to repeal an income tax. And it’s been a long time coming. The only other state to abolish its income tax was Alaska — and that was way back in 1980.

Since entering office in 2011, Haslam has led a fiscally responsible state, balancing the state budget every year while frequently 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. If signed, the Hall Tax phaseout would become the largest tax cut in state history, returning more than $300 million a year to taxpayers.

Tennessee’s economy will benefit from this continued trend of responsible spending and limited government. When the final phaseout of the death tax occurred earlier this year, Tennessee jumped from 17th to seventh in the American Legislative Exchange Council’s “Rich States, Poor States” rankings, the largest increase of any state. Like the death tax, the Hall Tax discourages saving and investing in our state. Its demise should also provide for a positive economic outlook.

The elimination of the Hall Tax will reward — rather than punish — frugal planning and boost investment in our state. For these reasons, we encourage Haslam to sign the tax cut into law when it reaches his desk.

 

Justin Owen is the president and chief executive officer of the Beacon Center of Tennessee.

Copyright 2016 The Daily Signal

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