No income tax is growing economic advantage for Tennessee, governor says

No income tax is growing economic advantage for Tennessee, governor says

November 8th, 2018 by Dave Flessner in Business Around the Region
Gov. Bill Haslam speaks at a ribbon-cutting ceremony for 8 new Volkswagen eLabs at Hixson Middle School on Tuesday, Aug. 21, 2018, in Chattanooga, Tenn. The 8 new labs complete a total of 16 technology-centered labs in schools across Hamilton County.

Gov. Bill Haslam speaks at a ribbon-cutting ceremony...

Photo by Doug Strickland /Times Free Press.

The lack of a state income tax in Tennessee is helping to lure more people and businesses to the Volunteer State, especially since the federal tax reforms adopted a year ago limit some of the tax exemptions possible for paying such payroll taxes in other states, Gov. Bill Haslam said Thursday.

"As the person who has been the kind of chief recruiter in the state, I can't tell you what a competitive advantage that is," Haslam told the Chattanooga Rotary Club Thursday. "You wouldn't believe how many people are calling us from high tax states like New Jersey, saying "this is crazy and we're looking for a new place to be.'"

Tennessee is one of only nine states without a personal income tax, which Haslam said is not only popular with voters "but it is proving to be a huge economic advantage." That advantage has widened as the deductibility for paying state and local taxes is now more limited and the after-tax impact of such payroll taxes is relatively more in high-tax states, Haslam said.

"There has always been a debate about the lack of a state income tax in Tennessee and whether we should have one," said Haslam, the state's outgoing governor who will leave the governor's mansion in January. "We don't have one; we're not going to have one, and we shouldn't have one."

Tennessee voters in 2014 voted by nearly a 2-to-1 margin to approve a constitutional amendment to prohibit the Legislature from enacting any state or local tax on payroll or earned personal income.

Supporters of an income tax claim such a tax can be structured to be more progressive so higher income people pay more to offset the rising income inequality in America, which Haslam acknowledged "is real and growing." Without an income tax, Tennessee has one of the nation's highest sales tax rates, including sales taxes on food, making the state's tax system one of the most regressive in the country.

"Unfortunately, our poor people pay disproportionately more and, if properly structured, a state income tax could actually reduce the tax burden for most Tennesseans while raising taxes for upper-income individuals," said Dick Williams, the former chairman of Tennesseans for Fair Taxation, a pro-income tax group.

Charles Wood, vice president of economic development for the Chattanooga Area Chamber of Commerce, agreed with Haslam that many business executives and employees like not having to pay an income tax in Tennessee.

"It is an advantage for us, but businesses have many factors in their location decisions and a lot of other factors get talked about more," he said.

Without a payroll tax, Tennessee also has to operate with fewer dollars, Haslam said. But as governor, Haslam said he pushed to make government leaner, more efficient and focused on public education, which he said is the most important way to reduce income inequality. The staff size of state government declined over 7 percent in the past eight years, Haslam said.

To expand educational opportunity and improve performance, Haslam said he is most proud as governor of the Tennessee Promise and Reconnect programs to help more high school graduates and older adults attend two years of community college tuition free. Federal student grants already pay much of those costs and expanding the program, in part with private funds, helped to market community college as a no-cost option for many who wouldn't otherwise consider such schooling.

"As one who once worked in retail, I know the appeal of something free," Haslam said.

The program has already boosted the share of Tennessee adults with a trade certificate or college degree from 31 percent to over 40 percent and, at the current pace, Tennessee should reach the goal of having 55 percent of the workforce with a college degree or trade certificate by 2025, Haslam said.

To achieve better outcomes, Haslam also pushed for more accountability and testing in elementary and secondary schools. Such measurements, although difficult and often controversial, are necessary to ensure effective results, Haslam said.

As he prepares to leave office, Haslam said he is most worried that as achieving higher standards and results gets more difficult, some may push undo such measures.

"I worry that people won't connect the dots about the educational improvements we've made and the hard decisions to achieve greater accountability (for students and teachers)," Haslam said. "My fear is that some say this is too hard and let's throw out the baby with the bathwater or quit trying so hard to measure what we are doing."

Haslam says his Apple watch let's him know when he runs how he is doing every day when he jogs. Without such measurements, Haslam said Tennessee risks going back to an era when its grades and results were judged to be inaccurate and poor because they weren't reliable or demanding enough.

Contact Dave Flessner at dflessner@timesfreepress.com or at 757-6340