In light of Tennessee’s not-so-glowing revenue picture, Gov. Bill Haslam doesn’t think now is really the right time to be talking about phasing out the state’s tax on investment income.
“The administration will not be proposing doing away with the Hall Income Tax, because we don’t see this year where we have the flexibility to do that,” Haslam told reporters Wednesday during a press conference at the state Capitol.
The tax, currently set at six percent of taxable income from investments and dividends over $1250 per person per year, was first established in 1929, six months before the stock market crash. The tax, named after state Sen. Frank S. Hall, is projected to raise $260 million for state and local governments for the 2014-15 fiscal year. State law requires that 37.5 percent of the tax revenue be returned to the communities it came from.
From 2011 to 2013, the Tennessee General Assembly incrementally raised the income-level at which people over 65 have to start paying the Hall tax. Currently, single filers with an income of less than $33,000 and to joint filers with at least one spouse at least 65 years old with an income of less than $59,000 are exempt.
Tennessee has “a very narrow revenue base,” and relies primarily on sales taxes and business taxes, Haslam said — noting that the latter have come in under projections “as businesses are becoming more strategic about what they pay.”
“As much as I might like to see the Hall Income Tax go away, I’m not going to propose that until we have a situation in the state that I think I can responsibly say that’s the right thing to do,” said the governor.
Recently Haslam told agency heads in his administration to prepare budget proposals that reflect a 7 percent cut from current operating budgets, which he has said is a routine part of the budgeting process. In 2013 Haslam asked department heads to prepare budgets that reflected a five percent decrease from the previous year.
The state’s tax revenues for August, the most recent month for which figures are available, showed a significant increase from the month prior.
While sales tax collections were $19.2 million more than estimated, business tax collections were close to a million dollars below estimates. When looking at the state’s overall fiscal picture, there’s reason “to be concerned about the relatively slow economic recovery in Tennessee,” Larry Martin, head of the Department of Finance and Administration, said in a press release last month.
But advocates for doing away with the Hall tax say there’s more wiggle-room in the state’s budget than the administration appears to be acknowledging — or at any rate, the goal ought to be to get rid of it over time, and that’s best done by committing to nibble away at it little by little, year by year.
Lindsay Boyd, policy director at the Nashville-based Beacon Center, said in an email that pushing forward with a multi-year plan for phasing out the Hall Income Tax — which she said contributes less than 2 percent of of total state revenues — can be accomplished “in a responsible manner” and in such a way as to “address all the budgetary concerns that (Haslam) currently has.”
The Beacon Center, which advocates free-market policies and lowering the state government’s tax burden on Tennesseans, released a plan last month suggesting that the Hall tax be lowered by a percentage point a year, beginning in 2016, until it is gone in 2021. Their plan also suggests installing “fiscal triggers” that would freeze the Hall tax phase-out in years when the state’s revenue “falls substantially short of projections.”
The center is also recommending that during the six-year phase-out, local governments be held “harmless” for their portion of the revenues as the state’s Hall tax-dollars steadily decrease. In addition, Beacon suggests the Legislature authorize local referendums allowing voters “to immediately end the tax locally or continue the city or county portion at local taxpayers’ discretion.”
Boyd wrote that because the Beacon Center’s proposal wouldn’t start kicking in until after next year, it “makes any discussions of Tennessee’s revenue projections for the coming year irrelevant to whether or not the tax can be repealed in 2015.”
The liberal Institute on Taxation and Economic Policy told the Tennessean earlier this year that there are problems with repeal, including that local governments facing a revenue shortfall from lost Hall tax funds might attempt raising property taxes, and residents who pay the tax could lose a deduction on their federal returns.
In part because of past hesitancy to commit to doing away with the Hall tax, Haslam didn’t fare well on the Cato Institute’s 2014 fiscal grading for the nation’s governors released this week.
The Republican Tennessee chief executive’s reluctance to take down the Hall tax — and his rhetoric with respect to the role of government — earned him a “D” on the report card.
“Like many governors, Haslam talks about rising spending as if it were a good thing,” the libertarian think tank noted. Cato faulted Haslam for not being “focused on maximizing quality and minimizing costs for citizens and taxpayers.”
While Haslam wasn’t the lone Republican with a “D” next to his name — he was joined by Ohio’s John Kasich, Michigan’s Rick Snyder and Florida’s Rick Scott — several of his Democratic counterparts were graded higher, including New York’s Andrew Cuomo with a “B” and Kentucky’s Steve Beshear with a “C.”
This past year, an attempt to roll back the state’s only tax on personal income was withdrawn by Senate sponsor Mark Green, R-Clarksville, after an amendment was added in the Finance, Ways and Means Committee to phase it out entirely over the next decade. An attempt to reach Green to see if he intends to introduce legislation again this year was not returned.
Andrew Ogles, director for Tennessee’s chapter of Americans for Prosperity, another conservative group that’s made taking out the Hall tax a priority, said Friday that they agree with Haslam that “repeal of the Hall Income Tax should be pragmatic and fiscally responsible.”
Echoing the Beacon Center, Ogles added, “Passing legislation that will make small cuts annually while including safeguards for revenue shortfalls will benefit the state and spur job creation.”
But according to an email from Haslam spokesman Dave Smith, the governor has “concerns about setting budget priorities more than a year out.”