McCormick starts debate: Cut Hall income tax or sales tax in Tennessee

House Majority Leader Gerald McCormick
House Majority Leader Gerald McCormick
photo Gerald McCormick

NASHVILLE - While some Republican state legislators want to eliminate one tax that affects about 125,000 individual Tennesseans and some 21,000 entities, two top GOP leaders say lawmakers should instead consider lowering one that would help millions.

State House Majority Leader Gerald McCormick, R-Chattanooga, and Senate Majority Leader Mark Norris, R-Collierville, this week filed a bill that would cut Tennessee's sales tax rate from 7 percent to 6.75 percent.

The sales tax paid by everyone who buys items ranging from chewing gum and baby food to clothes and cars generated about $7.2 billion last year in revenue.

Several lawmakers, meanwhile, intend to renew a push to eliminate the Hall income tax on stock dividends and bond interest, which is expected to generate about $264 million for state an local governments in the current budget.

McCormick said Friday he filed the sales tax bill "in an effort to put an idea out on the table as we continue to discuss tax reform, and hopefully find a solution that will decrease taxes for all Tennesseans and help economic growth throughout the state."

He added that "in the rush to cut taxes I think we just need to put everything on the table. And I talked to Leader Norris, too. Rather than just focus on one narrow issue -- the Hall income tax -- we thought we'd put this out there too as part of the conversation."

Earlier this week, Sen. Brian Kelsey, R-Germantown, announced he has joined the existing effort to phase out the Hall tax, a movement pushed last session by House Finance Committee Chairman Charles Sargent, R-Franklin, and Sen. Mark Green, R-Clarksville.

Last spring's bill was backed by Grover Norquist of Americans for Tax Reform as well as the Tennessee chapter of Americans for Prosperity, a group tied to billionaire brothers Charles and David Koch.

On Tuesday, Tennessee voters approved a constitutional amendment pushed by Kelsey to ban a general state income tax on wages and salaries. The state constitution already had a prohibition against an income tax, but two governors in the early 1990s and early 2000s unsuccessfully pushed one, gambling the state Supreme Court would allow it.

Noting the state already had a "revenue issue" last year with tax collections falling below projections, McCormick said that "before we let all the oxygen be sucked out of the room by just talk about the Hall income tax, make sure we talk about all the different taxes."

Cutting the sales tax would save consumers $250 million or more per year, McCormick estimated.

He acknowledged cutting the state sales tax by a quarter-cent would save shoppers 25 cents on $100 worth of goods -- food items are taxed less at 5 cents per dollar. But everyone would share in a sales tax cut and virtually all the money would find its way into Tennessee's economy, McCormick said.

In comparison, eliminating the 6 percent Hall income tax would benefit 124,062 individuals plus another 20,693 entities, according to a state Department of Revenue presentation made to lawmakers earlier this year.

The state estimates it collected $262.8 million in Hall taxes during the 2013 tax year. The state kept $170.1 million while cities and counties saw $92.7 million under an arrangement in which the state keeps five-eighths of the tax.

An estimated 111,117 of the 124,062 individuals -- or 90 percent -- paid less than $2,000, a total of $43.7 million in Hall taxes for 2011, Revenue Department figures show.

And 122,371 individuals or 98.64 percent of the total had tax obligations of less than $10,000 -- 60.9 percent of the total taxes owed -- amounting to $87.7 million. The remaining 1,691 individuals paid $56.2 million, according to the Revenue Department.

Of these, 65 or 0.05 percent paid $17.7 million, state figures show.

To have a $2,000 Hall tax payment, a married couple would have to have $35,850 in dividend and/or interest income, the Revenue Department estimates.

Another $31.8 million was paid by various entities with investments affected by the tax.

Proponents say eliminating the tax would benefit retirees.

"This punitive tax punishes those who save for retirement and essentially taxes their income twice," Americans for Prosperity in Tennessee and the Nashville-based Beacon Center said in a recent statement. "Tennessee has an asterisk listed beside it every time we are mentioned with other states that are truly income-tax free, solely because of this tax."

"2015 is the year to Axe the Tax," says the group, which proposes phasing out the 6 percent levy by 1 percent a year, economic conditions permitting. Kelsey is talking about eliminating it in three years.

Republican Gov. Bill Haslam says while he doesn't like the Hall tax, he doesn't think it would be responsible to eliminate it given the state's revenue situation and required increases in spending for education and health care.

Lawmakers in recent years have raised the exemption levels of the tax in an effort to help the poorest.

The Institute on Taxation and Economic Policy, a liberal leaning think tank, last spring estimated that if the tax were eliminated, Tennessee's wealthiest residents with annual incomes of $970,000 incomes would receive "a whopping 63 percent of the benefits of the tax cut."

Another 23 percent would end up in federal government coffers because residents who paid the Hall tax would no longer be deducting state payments on their federal tax returns, the think tank said.

The remaining 14 percent "would be spread thinly" among other Tennesseans with small investments who would save an average of less than $50 per year, the think tank said.

Contact staff writer Andy Sher at asher@timesfreepress.com or 615-255-0550.

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