Tennessee’s stealth income tax needs to go

There are some great reasons to live in Tennessee. We have four distinct seasons, none of them too severe. We’re surrounded by awe-inspiring natural beauty and the opportunities for getting out into it abound. There’s a great musical and cultural heritage in Nashville, Memphis and eastern Tennessee. We’re home to Graceland, Sun Studios, the Ryman, hot chicken, Neyland and Rocky Top.

And on top of it all, many might add, there’s no state income tax.

Except that there is. It’s called the Hall income tax. A lot of Tennesseans are unaware of it because it doesn’t affect many of us. And that’s precisely what the tax’s opponents find so unfair about it.

The Hall income tax

The Hall tax, enacted in 1929, is a 6 percent personal income tax on interest and dividends earned from investments. It’s named after Frank S. Hall, the state senator who sponsored it. The tax revenue is split between the state, which gets 62.5 percent, and cities and counties, which get the remaining 37.5 percent. Almost half of the citizens paying the Hall tax are 65 and older. Almost 90 percent of those make less than $34,000 a year in investment income.

The debate

Those opposed to the tax say it puts an undue burden on Tennesseans aspiring to save and grow their retirement. They also point to the fact that it’s especially terrible for two groups — business owners and retirees — who are vital to the state’s economy. Many companies are structured so that their profits are distributed as dividends, and many retirees depend heavily on their investments to get by. What’s more, Tennessee has recently gained attention as an attractive retirement relocation destination, thanks to advantages such as those listed above and its low cost of living. Last year, a Bankrate.com study called Tennessee the No. 1 spot in the nation to retire. The Hall tax encourages both business owners and retirees to look elsewhere, critics say.

Advocates of the Hall tax, on the other hand, typically have a simple defense. The Hall tax provides more than $200 million in taxes, and the counties and local municipalities would have difficultly replacing that lost revenue stream.

Efforts to repeal

Because the tax is such a hot topic, there have been repeated efforts in the General Assembly over the years to repeal it. Just this last session, a full repeal lost in the final hours of legislating, but an increase in the income exemption did pass. Beginning in January 2016, the amount those 65 and older can earn per year without owing the Hall tax will increase from $33,000 for individual filers and $59,000 for joint filers to $37,000 and $68,000, respectively.

Possible way forward

We’re still three months away from the next General Assembly, but State Sen. Brian Kelsey (R-Germantown) has already announced that he’s got a plan to sustain local government funding if the Hall tax is repealed in the next session — which he supports. Kelsey’s amendment calls for the state to provide cities and counties an annual payment equal to the average of the last five years of Hall tax receipts. The state budget has the surplus Kelsey says, pointing to a recent economic forecast by a prominent economist.

I love Tennessee for its climate, its outdoor grandeur, its music, its food and its friendly people. I would like to add to that long list the absence of an income tax — of any kind. Our economy and our businesses could use it, and our retirees who have worked and planned hard deserve it.

Phoebe Venable, chartered financial analyst, is president and COO of CapWealth Advisors LLC.