Hall income tax phase-out could make Chattanooga a retiree haven, experts say

About four of every 10 people who move to the Chattanooga area come from outside of Tennessee, and the phase-out of the state's Hall income tax will make the city even more attractive to retirees and others, an expert says.

George Ratiu, senior economist for Realtor.com, says the elimination of the income tax is "a crucial component for Chattanooga and Tennessee overall and makes them very attractive as a destination."

The Tennessee General Assembly agreed in 2016 to start reducing the Hall income tax, with its total phase-out beginning Jan. 1, 2021.

For this year, the rate is just 1 percent.

Enacted in 1929, the Hall income tax is imposed on individuals and other entities receiving interest from bonds and notes and dividends from stock. From a 6 percent tax rate on investment income, the levy was to be reduced by 1 percent each year though 2020. Estimates from the Tax Foundation are that about 200,000 Tennessee households pay the Hall tax.

Once the tax is gone in 2021, Tennessee will join seven other states - Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming - that do not tax individual income.

Mark Cunningham, the Beacon Center of Tennessee's vice president of communications and outreach, says that elimination of the Hall tax "absolutely" will help woo more retirees to the Volunteer State.

"One of the main reasons we worked to get rid of the Hall tax was to make Tennessee more competitive with states like Florida in bringing more retirees to the state," says Cunningham, who works for the Nashville-based conservative-leaning think tank.

Cunningham says the center already has seen evidence of more retirees coming to Tennessee and "as a truly tax-free state, we expect to see that trend continue."

It's estimated that over half the tax paid to the state from the Hall tax is derived from middle class retirees who have invested in 401Ks or mutual funds. The average tax liability in 2014 was about $1,400 per person, according to the CPA group PHB.

Ratiu says there are a couple of demographic forces at work that weigh into the elimination of the Hall tax helping Chattanooga and Tennessee attract more retirees.

One is that many baby boomers have built careers in large cities and are looking for retirement locations that offer a good quality of life as well as a university presence, he says.

"Chattanooga checks the box on that," Ratiu says.

Another paramount issue is the cost of living, he says.

"The tax implication is very important," the economist says. "We've seen that with Florida."

For those on fixed incomes, as are many retirees, taxes play a critical role particularly with retirement decisions, he says.

A no-income-tax environment will help play off Chattanooga's strengths when it comes to offering a lot of outdoor amenities and a vibrant arts and culture scene, Ratiu says.

However, he adds, it's not just retirees or boomers who are interested in saving money on taxes.

Ratiu says that younger professionals as they become middle-aged see the tax issue as an important one as they have children and look at lifestyle choices.

However, Tennessee still faces some headwinds when it comes to taxes.

According to Motley Fool, while combining elimination of the Hall tax with the state's relatively low property taxes could make the state more popular with retirees, Tennessee's combined sales and local tax rate is among the highest in the country. Motley Fool puts Tennessee among the top seven states when it comes to consumers hit hard by state and local taxes.

Also, the phase-out of the Hall tax - the proceeds of which went to many small cities in Tennessee - has taken a bite into their budgets.

Three-eighths of the Hall tax, or 37.5 percent of the revenues collected in each city, is distributed to the local government of the municipality or county where the taxpayer resides.

Cities that rely on the funding to offer local services like schools, roads and fire protection have had to look for alternative ways to regain some of the lost revenue for municipal services such as property taxes.