April 8, 2014

The Tennessean: Hall tax cut gets new push

media mention

(Original Post)

5:07 p.m. CDT April 7, 2014

Tennessee lawmakers are seriously considering a new proposal to roll back the state’s tax on investments, even as they wrestle with a growing hole in the state budget.

More than 90 legislators have signed onto a pledge from a prominent anti-tax organization to support a measure that eventually would end the “Hall income tax,” Tennessee’s tax on income from stocks and bonds.

House Speaker Beth Harwell, Lt. Gov. Ron Ramsey, other Republicans and even some Democrats are saying they back legislation that would tie cuts to the state’s 6 percent investment tax to growth of other revenue.

The initiative appears to be gaining steam in the final days before state lawmakers adjourn for the year and return to their districts to campaign for re-election. A plan to repeal the tax could win them political support, particularly from retirees who have complained that it is unfair to tax their primary source of income while most Tennesseans pay no state income tax.

But the move comes as lawmakers try to wrap up business for the year and deal with a shortfall in tax collections that already has reached $259.9 million. Gov. Bill Haslam opposes a cut, noting that his administration agreed in 2011 to soften the tax’s impact on senior citizens.

“As you know, we’re in the middle of dealing with difficult budget realities,” said David Smith, a spokesman for the governor, “and this legislation would automatically put the issue above other priorities when revenues come back.”

The cut could have an impact on local governments, especially wealthy communities that rely on their share of Hall income tax revenues to balance their budgets and keep property taxes low. The cut also could force Tennesseans to pay more in federal income taxes, wiping out most of the savings.

Supporters, however, intend to present plans this week to phase out the tax in the House and Senate finance committees.

“I think that we always want to eliminate a tax that many people feel is unfair,” Harwell said Thursday. “But we want to do it in a fiscally responsible way.”

Tennessee expects to collect about $260 million this year through the Hall tax. State law requires a little over one-third of that revenue to be shared with the cities and counties where the taxpayers live. Eliminating the tax would cost Nashville about $10 million a year.

Still, lawmakers have repeatedly debated reducing or repealing the tax. The latest proposal, which could be added to House Bill 1367, would cut the Hall income tax by 1 percent a year, starting Jan. 1, 2017, if state revenues outpace inflation and population growth.

If it were to pass, the tax could disappear completely in 2022. State Rep. Charles Sargent, R-Franklin, said the long phaseout would give municipalities time to prepare. The state has followed a similar plan to eliminate the inheritance tax.

“I feel it makes sense,” he said. “And I think a number of people in the General Assembly and our taxpayers believe it makes sense.”

The proposal is receiving a push from Tennessee chapter Americans for Prosperity, the conservative advocacy group founded by the Koch brothers. The group has persuaded more than 90 legislators, including Harwell and Ramsey, to sign a pledge that they’ll back repeal. It also has aired radio ads attacking and praising various legislators for their stances on the issue.

Americans for Tax Reform and its president, Grover Norquist, also have pushed for repeal this year.

But a more liberal group, the Institute on Taxation and Economic Policy, says most Tennesseans will see $50 or less in savings if the tax is repealed, in part because those who pay it will no longer be able to deduct their payments from their federal taxes. Local governments also might raise property taxes in response, the group said.

“The Hall income tax is very important to Oak Hill’s budget,” said Mayor Austin McMullen, whose Davidson County community derives about 40 percent of its income from the Hall tax. “It would be up to what the people would want to see happen, but it would have to come from somewhere.”

Hall income tax

The state has taxed investments on stocks and bonds since 1929. The tax was named after state Sen. Frank S. Hall, who sponsored the bill passed by the General Assembly six months before the Wall Street crash the following October.

The current tax of 6 percent brings in about $260 million a year, 37.5 percent of which it sends back to the cities and counties where the taxpayers reside. The rest funds general state spending.

Because Tennessee does not tax salaries and wages, opponents of the Hall tax say it is unfair, particularly to senior citizens who rely on income from their investments. In response, Gov. Bill Haslam signed a bill in 2011 that raised exemptions for people 65 years old and over to $33,000 for individuals and $59,000 for couples. For other Tennesseans, the first $1,250 earned by individuals and $2,500 earned by couples is exempt.

The Institute on Taxation and Economic Policy, a left-leaning organization, says eliminating the Hall tax would save 99 percent of taxpayers $364 or less, with two-fifths of taxpayers seeing no effect whatsoever. The wealthiest 1 percent would see an average savings of $4,153 a year.