Hall income tax
The Hall income tax is a Tennessee state tax on interest and dividend income from investments. It is the only tax on personal income in Tennessee, which does not levy a general state income tax. The tax rate prior to 2016 was 6 percent, applied to all taxable interest and dividend income over $1250 per person ($2500 for married couples filing jointly). Revenues are shared with the government of the municipality or county where the taxpayer resides.
The Hall tax is named for Frank S. Hall, who introduced the bill in the Tennessee State Senate in 1929. The bill was enacted and became Chapter 86, Public Acts of 1929. Authority for the tax derives from the 1870 amendments to the Tennessee State Constitution, which gave the General Assembly the power "to levy a tax on incomes derived from stocks and bonds that are not taxed ad valorem." In 2004, an analysis suggested that this provision of the state constitution had been intended to address difficulties that Tennessee government had experienced in its efforts to apply property tax to intangible forms of property. An opinion of the Tennessee Supreme Court in 1929, issued in the case of Shields v. Williams and written by Chief Justice Grafton Green, found that the Hall tax was a privilege tax, not a property tax. Therefore the Hall tax was not subject to a provision of the state constitution requiring all property to be taxed uniformly.
At first, the tax rate was 5%, and all revenue collected by the state government was retained by the state government. In 1931, the General Assembly amended the law to distribute 45% of the revenue to local governments. This had the effect of allocating 2.75 percentage points of the taxable income to the state government and 2.25 points to local government. In 1937, the tax rate was increased to 6% and the portion allocated to local governments was reduced to three-eighths of the total, thus keeping the local governments' share at 2.25 percentage points of the taxable income reported by their residents. This allocation remains in effect.
In 2016, the state reduced the Hall income tax to 5% with intention to eliminate it completely. On April 26, 2017, Governor Haslam signed into law a reduction in the tax rate each year between 2017 and 2020 and a full repeal of the tax in 2021.
- 4% for tax years beginning January 1, 2017, and prior to January 1, 2018
- 3% for tax years beginning January 1, 2018, and prior to January 1, 2019
- 2% for tax years beginning January 1, 2019, and prior to January 1, 2020
- 1% for tax years beginning January 1, 2020, and prior to January 1, 2021
- Full repeal for tax years beginning January 1, 2021
The Hall tax applies to interest and dividend income received by people who maintain their legal residence in Tennessee, including part-year residents who live in the state for at least six months of the year.
Dividends subject to the tax are dividends from corporations, investment trusts, and mutual funds, including capital gains distributions from mutual funds. Taxable forms of interest include interest on bonds issued by persons, corporations, churches, joint stock companies, business trusts, U.S. states and local political subdivisions outside Tennessee, and foreign governments; and interest on mortgages, commercial paper, and other written obligations that mature more than six months after the date of issue. The tax does not apply to income from government obligations issued by the U.S. federal government and Tennessee state or local governments. Dividends from stock in banks and similar institutions (but not bank holding companies), as well as several types of Tennessee business, are exempt from the tax. Interest paid on bank and credit union accounts also is not subject to the Hall tax, regardless of the location of the bank.
The first $1,250 of a person's interest and dividend income that would otherwise be subject to the Hall tax is exempt from taxation. Married couples may file joint returns, in which case $2,500 of the couple's joint taxable interest and dividend income is exempt. Blind people and people over 65 years old whose total annual income is $33,000 or less ($59,000 for joint filers) are not subject to the Hall income tax. Some interest and dividend income received by a person who is a quadriplegic is also exempt from the tax.
Evasion of the Hall income tax may be prosecuted as a Class E felony, with penalties of up to two years in state prison and up to $3,000 in fines. The Tennessee Department of Revenue uses Internal Revenue Service data to assist in identifying taxable income that is not being reported.
The Hall income tax accounts for about 2% of Tennessee's state tax collections. Revenue from the Hall tax peaked at $289.7 million during Tennessee's fiscal year 2008, when almost 192,000 households paid Hall income tax, based on returns filed for calendar year 2007. Hall income tax collections totaled $213.9 million and $172 million for calendar years 2008 and 2009, respectively (paid in Tennessee's fiscal year 2009 and fiscal year 2010). About 156,000 state households paid the tax in fiscal year 2009 for income received in 2008.
Revenue from the Hall income tax varies significantly from year to year, making it difficult for governments to predict. Some of the largest year-to-year changes occurred in FY 1998, when collections increased 25.5% from the previous year, and FYs 2002 and 2009, when collections dropped 26.1% from the previous years. A principal reason for the large variability in revenues is the application of the tax to capital gains distributions from mutual funds. A 2004 report by the Tennessee Advisory Commission on Intergovernmental Relations observed that capital gains from investments had displayed "roller-coaster behavior" over the preceding eight years. The Tennessee Advisory Commission on Intergovernmental Relations identified this variability, coupled with increased investor participation in mutual funds, as the main cause of fluctuations in Hall tax collections during the same period.
Distributions to municipalities and countiesEdit
Three-eighths of Hall income tax payments are distributed to the local government of the municipality or county where the taxpayer resides. There are no restrictions on how local governments use the money. This distribution arrangement may be related to the genesis of the Hall tax as a property tax on an intangible property.
Distributions to municipalities are generally larger than distributions to counties. In FY 2003, combined distributions to all of the state's municipalities totaled $42,332,061, or an average of $13.22 per municipal resident, while distributions to counties were $8,184,443, an average of only $3.30 for each resident living outside city limits. In FY 2003, the largest per capita recipient of Hall income tax distributions was Belle Meade, a wealthy enclave in Metropolitan Nashville-Davidson County, which received a per capita distribution of $491.68. At the low end, 14 municipalities had no income from the Hall tax. Per capita distributions to counties ranged from a high of $15.41 to Williamson County to a low of $0.40 to Hancock County.
Although the Hall income tax is a relatively minor source of revenue for most local governments, it is a major source of funds for a few small municipalities, particularly those with wealthy residents. The government of the City of Belle Meade receives over one-third of its revenue from the Hall income tax. Other Tennessee municipalities identified as highly dependent on the tax, based on 1997 data, are Forest Hills, Allardt, Lookout Mountain, Slayden, and Walden.
In FY 2010, combined payments to Knox County and its included municipalities (including Knoxville) totaled $12.5 million, the highest of any county in the state. Shelby County and its municipalities (including Memphis) received a total of $11.4 million, while Davidson County and its municipalities (including Nashville) received a total of $10.4 million. Other counties where combined payments to the county and municipalities exceeded $1 million were Hamilton County ($5 million), Williamson County ($4.5 million), Sullivan County ($1.4 million), and Sumner County ($1.3 million). At the low end, Hancock County and its municipalities received a total of $2,755.
Criticisms and proposals for changesEdit
The Hall income tax has been the subject of chronic criticism, primarily for being regressive and for having a negative impact on retired people. The IMPROVE Act, enacted in 2017 to phase out the tax, is the latest in a long line of legislative proposals that would eliminate it, replace it with a general personal income tax, or change its rates or exemptions. In the late 1990s and early 2000s, there were bills to raise state government revenue by reducing the fraction of the Hall tax that is distributed to local governments.
The proposals for major changes to the Hall tax failed because of the lack of alternative sources of revenue. The Hall tax is Tennessee's only tax on personal income; the state does not levy a general personal income tax.
In 1932 and 1960, the Tennessee Supreme Court rejected proposals for a general personal income tax. Through 1974, the Tennessee Supreme Court had consistently held that the state constitution authorized only three types of taxes: privilege taxes, ad valorem property taxes, and a tax on income from interest and dividends. In 1981, 1991, and 1999, three different Tennessee Attorneys General issued opinions that a general income tax would not violate the state constitution. However, in 2014, the state constitution was amended to explicitly prohibit a tax on earned income.
In December 2004, a Tennessee Tax Structure Study Commission said the Hall income tax was regressive, anti-competitive, and "unfairly selective". Its final report called the tax "particularly harmful to retirees with limited income derived mainly from investments",:6 noting that low-income retirees with dividend and interest income pay the tax, but low-income people with income from other sources do not.:37 The report also said the tax "encourages retirees to leave the State".:37 The commission recommended repealing the tax, reducing or repealing certain other state taxes, and enacting a general personal income tax in their place.
On the other hand, the Institute on Taxation and Economic Policy said the tax is actually the only major progressive tax levied in Tennessee—amounting to 0.4 percent of income for high-income taxpayers compared to 0.0–0.1 percent for less affluent Tennesseans.
Other critics have suggested that the tax discourages people from saving and hinders efforts to encourage retirees to settle in Tennessee. Organizations including the League of Women Voters of Tennessee and Tennesseans for Fair Taxation have endorsed the repeal of the Hall income tax as part of comprehensive tax reform that includes a broad-based personal income tax.
The Tennessee Center for Policy Research, in a "Legislator's Guide to the Issues" published in 2009 and 2011, called the 6-percent rate "sizeable" and said the tax "makes Tennessee an unwelcoming place, particularly for retirees and the wealthy". It advocated repealing the tax "to encourage wealthy and retired individuals to move to Tennessee" and cutting state spending to offset the lost revenue.
In the 2011 General Assembly, eight bills were introduced to reduce or eliminate the Hall tax, including a total phase-out comparable to the one enacted in 2017. The only one that passed was a measure to increase the income exemptions for persons over 65 by $10,000, to $26,200 for individual taxpayers and $37,000 for joint filers. It made about 4,725 taxpayers eligible for the tax exemption, reducing revenue by about $1.65 million, including $1 million for the state and $650,000 for local governments. Governor Bill Haslam had earlier endorsed this proposal, saying: "If you're retired and living on dividends, I'm not sure why you should be treated so much different from someone who's living on a salary."
- Tenn. Code Ann. § 67-2-102
- Denson, Sarah (April 26, 2017). "Tennessee governor signs IMPROVE Act into law". Associated Press. WKRN. Nexstar Broadcasting, Inc.
- "Hall Income Tax Notice Notice #17-09: Phasing Out of the Tax". Tennessee Department of Revenue. May 2017. Archived from the original on July 12, 2017.
- Black, Diane. "Tennessee Senators, Territorial General Assembly 1794 to 106th General Assembly, 2009-10". Tennessee State Library and Archives. (The list shows that Hall was a Democrat representing the 23rd District, including Dickson County, Houston County, Humphreys County, and Stewart County.)
- Trotter, T.O. "The Tennessee Income Tax Law of 1929". Tennessee Law Review. 106. 1929–1930.
- Stanley Chervin and Harry A. Green, Hall Income Tax Distributions and Local Government Finances, Tennessee Advisory Commission on Intergovernmental Relations, April 2004
- 159 Tenn. 349 (1929).
- Rose M. Naccarato (2006), Options for Tennessee's Tax System: A Prospective Portfolio Analysis" (dissertation). Graduate School of Vanderbilt University. August 2006.
- Procedures for Filing the Income Tax Return, Tennessee Department of Revenue, November 2001.
- Locker, Richard (May 20, 2016). "Gov. Bill Haslam signs Hall income tax cut, repeal into law". The Tennessean. Retrieved December 11, 2016.
- "Frequently Asked Questions: Individual Income Tax". Tennessee Department of Revenue. Retrieved May 1, 2011.
- "Individual Income Tax". Tennessee Department of Revenue. Archived from the original on April 12, 2015.
- "Guidance for Tennessee's Individual Income Tax Return". Tennessee Department of Revenue. Retrieved May 16, 2011.
- "Old Hickory Resident Arrested for Income Tax Evasion" (press release). Tennessee Department of Revenue. March 12, 2010.
- Hamilton, Anita; Worthington, Mark (July 2008). "State Tax Liaison Meeting". Tennessee CPA Journal. p. 6–7.
- Locker, Richard (March 8, 2010). "Income tax does exist in Tennessee: Levy targets 'unearned' returns on investments". Memphis Commercial Appeal.
- "Cutting Hall Income Tax could hit city budgets in Tennessee". WATE-TV. January 25, 2011.
- "Cutting Hall Income Tax could hit Tenn. budgets: Sullivan near top of the list in collections". Associated Press. Kingsport Times-News. January 25, 2011.
- "Hall Income Tax". Newsletter to Residents. City of Belle Meade. March 2011. p. 1.
- Humphrey, Tom (January 26, 2011). "Listing of Revenue to Local Governments From Hall Income Tax". Knoxville News Sentinel.
- "The Facts on Tennessee's Tax Climate". The Tax Foundation. Retrieved May 1, 2011.
- Armstrong, Jr., Walter P. (1974). "Constitutional limits on income taxes in Tennessee". 27 Vand. L. Rev. 475.
- "The Income Tax IS Constitutional". Tennesseans for Fair Taxation. 2008. Retrieved May 8, 2011.
- Davis, Jr., Maclin P. "The Constitutionality of the Proposed Tennessee Income Tax". Tennessee Tax Revolt, Inc.. Retrieved May 8, 2011.
- "Final Report". Tennessee Tax Structure Study Commission. December 2004.
- "Who Pays: Tennessee State & Local Taxes". Institute on Taxation and Economic Policy. January 30, 2013.
- "TFT: Replace Hall Tax with 'Broad Based Tax on Income with Generous Exemptions and Modestly Graduated Rates'" (press release). Tennesseans for Fair Taxation. Tennessee Report. January 28, 2011.
- "Rationale for LWVTN Support of Tax Modernization and Fiscal Stimulus Act, SB 2054 Tate, HB 2182 Turner". League of Women Voters of Tennessee. 2009. Retrieved May 17, 2011.
- Johnson, Drew; Mitchell, Shaka; Owen, Justin (2009). "106th Tennessee General Assembly Legislator's Guide to the Issues". Tennessee Center for Policy Research.
- Owen, Justin; Milojevich, Allyn; Causseaux, Jourdon (2011). "107th Tennessee General Assembly Legislator's Guide to the Issues". Tennessee Center for Policy Research.
- Sisk, Chas (May 8, 2011). "Hall tax break would help senior citizens". The Tennessean.
- Humphrey, Tom (May 23, 2011). "Tennessee legislators pass bills to give tax breaks". Knoxville News Sentinel.
- Humphrey, Tom (May 8, 2011). "Haslam Backs Hall Income Tax Break for Those Over 65". Knoxville News Sentinel.