NASHVILLE — Gov. Bill Haslam on Friday signed into law a bill that phases out Tennessee's Hall Income Tax on bond interest and investments by 2022, winning praise from proponents but drawing groans from local governments that share the proceeds of the tax.
His signing the bill to end the 6 percent Hall tax came despite the Republican governor's lingering concerns that while state revenues are booming right now, enshrining the 1 percent cuts per year in statute could pose problems.
"The governor has long stated his wish to repeal the Hall Income Tax," Haslam press secretary Jennifer Donnals said in a statement in response to questions. "It penalizes saving and investing, and because it is concentrated on a small number of people coming or going from Tennessee, there can be significant shifts in revenue, making it undependable."
But Donnals acknowledged the governor "is concerned, however, with the approach taken to reduce and eliminate it" and noted the state "will not always have revenues like we had this year."
The levy, enacted in 1929, raised about $300 million in tax year 2014, according to budget documents, and affects about 205,000 Tennesseans. The Tennessee Department of Revenue says the average liability per return was $1,446. Put another way, the median liability per return was $266, meaning half of the returns filed had a liability of $266 or less.
First-year cuts amount to a 17 percent reduction for taxpayers. The state will lose $28 million in revenue, while cities and counties where the tax is collected will lose another $15 million.
Two conservative groups that pushed the repeal celebrated.
"I'd like to thank Governor Haslam for making the decision to end this destructive tax once and for all," said Beacon Center CEO Justin Owen, who called the repeal a "signature victory" for the group. "Signing this bill is yet another sign of his leadership when it comes to cutting taxes and making Tennessee a competitive state for economic growth."
Andrew Ogles, state director for Americans for Prosperity-Tennessee, said the phase-out "represents a huge win for taxpayers, especially retirees who've sacrificed and saved for retirement."
Three-eighths of Hall proceeds are shared with the cities and counties where the taxpayers live. One town that will be hard hit is the wealthy town of Lookout Mountain, Tenn.
"Lookout Mountain is one of the few communities in the state that receives a good portion of our budget from the Hall tax," said Dwight Montague, the town's consultant, who estimated it accounts for a "huge chunk" of revenues, about 20 percent. State revenue department records show the town's share of Hall tax revenue came to nearly $574,000 in tax year 2014.
Because the town "doesn't have really any other revenue sources that we have any control over other than property taxes," Montague said Lookout Mountain "would either have to cut services or increase [the] property tax to replace that. We'll lose in the range of about $100,000 every year."
"One thing about it is not everyone has to pay the Hall tax, but everyone who owns a home has to pay property taxes," Montague said. "So if we have to increase property tax to replace the lost Hall tax, then it kind of spreads the pain to a wider audience."
Officials are "definitely not happy about it," Montague added. "We don't have any choice. We have to adjust. There is no choice about it. We can't just close shop. We have to either increase property tax or cut services or both."
Ted Rogers, Collegedale's city manager, called it "troubling that the General Assembly continues to find ways to attack cities in Tennessee, which are the economic drivers of the state economy."
The city collected $255,000 in tax year 2014.
"When cities our size who are very fiscally responsible lose hundreds of thousands of dollars in revenue it ultimately means tax increases or reduction in services," Rogers said. "It is very concerning that we decrease revenue streams when our state is primarily funded through consumption taxes that can radically be driven by economic conditions."
Dylan Grundman, senior analyst at the Institute on Taxation and Economic Policy, called elimination a "major step backward for tax fairness in Tennessee, not to mention a brazen giveaway to the wealthiest Tennesseans.
"Already, Tennessee's lack of a broad-based income tax and comparatively high sales tax make the state's tax system one of the most regressive in the nation," Grundman said. "By repealing the Hall tax, Tennessee lawmakers are doubling down on an upside-down tax system that taxes the poorest 20 percent of Tennesseans at a rate nearly four times the rate it taxes the top 1 percent."
He warned that "eliminating this important source of revenue for both the state and its localities is likely to mean funding cuts to Tennessee services as well as property tax hikes down the road."
Haslam, whom Forbes magazine has estimated has a net worth of $1.5 billion, in the past has resisted eliminating the Hall tax entirely, noting that as one of the lowest-tax states in the U.S., Tennessee is heavily reliant on the sales tax and doesn't have a general income tax.
Donnals said the Hall tax "is a small piece of a much larger puzzle we have tried to manage effectively and efficiently in state government. [Haslam] often compares governing to a relay race, and he will hand off the baton to the next governor."
She warned that "as we move forward with this plan at this time, there will be more difficult decisions to be made."
Because of that, Donnals said, Haslam "expects the legislators, advocacy groups and other stakeholders who have supported the automatic repeal of the Hall tax to be equally strident in their support of this administration's efforts to find the efficiencies needed to meet the aggressive timetable set forth in this legislation."
Staff writer Emmett Gienapp contributed to this story.
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