Green: Ditch the Hall Income Tax

Green: Ditch the Hall Income Tax

April 16th, 2014 by Sen. Mark Green in Opinion Columns

People like to say Tennessee has no income tax, but that's not true. Eighty-five years after it was imposed at the urging of Sen. Frank Hall on the eve of the Great Depression, the so-called Hall Income Tax continues to chip away at Tennesseans' nest eggs with an onerous tax on dividends and interest.

It's a yearly tax on the good habits of savings and thrift; it keeps retirees, job creators and venture capitalists from coming here; and it is riddled with exemptions that favor politically active corporations over others and distorts the free market.

We ought to repeal it.

There's an old saying that if you want to discourage something, tax it. By that reasoning, the Hall Tax discourages savings and thrift by taxing the interest and dividends on your savings and investments.

From the standpoint of the tax, you're better off blowing your money than saving it: the tax will only affect you if you save.

Tennessee competes every day for the dollars of retirees who can choose to live here, or in Florida, Texas, or any of the other four states that really do not have an income tax -- on dividends, interest or anything else.

These are folks who need every nickel of their savings, who carefully compare the tax advantages of one state over another. The Volunteer State is disadvantaged by comparison, and the 6 percent Hall Tax is the reason.

Aside from retirees, the tax is a disincentive to others whose incomes consist largely of dividends and interest: among them, the investors who help create jobs. Those who want to keep the tax ought to consult with one of their out-of-work neighbors; they are still all too plentiful.

In the view of the Hall Tax, not all investments are created equal. Some are given a preference -- and a nice one, too.

If you invest in, say, an emerging start-up in Memphis' High Tech Corridor, your dividends will be subject to the tax if your combined dividends and interest reach the $1,250 threshold ($2,500 for a married couple filing jointly).

Invest in bank stocks, or insurance company stocks, however, and your dividends are Hall Tax-free.

Why the preference for bank investments over others? Two words: good lobbyists.

In a free enterprise system like ours, government has no business encouraging one form of investment over another. It's an example of crony capitalism -- government choosing winners and losers -- and it has no business in Tennessee law.

Repealing the Hall Tax will be a formidable challenge, one that may well take us years to accomplish. Still, we begin the process of repealing it by building support, which is why I am grateful that my Republican colleagues, Sens. Mike Bell (Riceville), Jim Tracy (Shelbyville), Stacey Campfield (Knoxville) and Jim Summerville (Dickson), have joined me in sponsoring Senate Bill 1427. A companion measure, House Bill 1367, has been introduced by state Rep. Charles Michael Sargent (Franklin) and seven other House members.

There are two major hurdles to repeal. Local governments rely on revenue streams funded by the Hall Tax, and those funds must be replaced. Senate Bill 1427 ensures local governments are protected: Over the multiyear phase-in, the state will continue to collect Hall Tax revenues on behalf of communities at current levels. The adjustment will be especially challenging in years like this one, in which revenues are already below projections. That's why the bill defers adjustments in the tax in years revenue growth is slow.

In the final analysis, the Hall Income Tax is simply a bad law, with the unintended consequence of punishing thrift and savings on which job creation and economic growth depend. We need to begin the process of repeal by passing SB1427/HB1367.

Dr. Mark Green is a member of the Tennessee Senate, representing the 22nd District (Clarksville).