Getting Rid of Tennessee's Investment Tax

February 21, 2014

States have been using fiscal policy to compete with one another at an unprecedented rate. Currently, nine states do not impose an income tax. Tennessee is technically one of those states; however it does impose a 6 percent tax on investment income, taxing dividends and interest, says Patrick Gleason, director of state affairs at Americans for Tax Reform.

State lawmakers are likely to repeal that tax (known as the Hall Tax) this year, an important move at a time when states across the country are cutting taxes and making themselves more attractive to businesses and individuals alike. Tennessee's neighbor North Carolina had a major tax overhaul last year that included cutting their personal income tax rate down to a flat 5.75 percent.

What would eliminating the investment tax mean for Tennessee? The Tax Foundation determined that the repeal would move the Volunteer State from the 15th best state for business up to the 11th.

  • Tax Foundation economist Scott Drenkard said of the issue, "Tennessee's choice to go without a tax on wage income is great, but the Hall Tax on interest and dividends negatively impacts economic growth. Interest and dividends are savings vehicles, and taxing them hurts the potential to draw on that money later for larger purchases: college tuition, homes, things that make the economy grow."
  • Retirees are heavily impacted by investment taxes, as they often have no other form of income.

Opponents of the Hall Tax repeal call the cut a "tax cut for the rich," which could not be further from the truth.

  • A majority of Tennessee taxpayers receiving dividends -- 56 percent of them -- earn less than $75,000 per year.
  • Forty percent of households in Tennessee with dividend income earn less than $50,000 annually.

The damage done by the tax is not worth the paltry revenue generated by it. The tax is only responsible for 0.9 percent of Tennessee's state and local revenue.

As the federal government continues to impose new taxes (in the last four years alone, over 20 new tax increases have come out of Washington), state lawmakers must work to provide tax relief for their citizens.

Source: Patrick Gleason, "States Continue to Chip Away At Income Taxes In 2014," Forbes, February 12, 2014.

 

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