Hall income tax

Not to be confused with Hall–Rabushka flat 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 current tax rate is 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.

History

The Hall tax was established by action of the Tennessee General Assembly in 1929, by Chapter 86, Public Acts of 1929, enacted on April 10, 1929.[1] It is named for Frank S. Hall,[2] the state senator who sponsored the legislation. 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.” A 2004 analysis suggests that this provision of the state constitution was intended to address difficulties that Tennessee government had experienced in its efforts to apply property tax to intangible forms of property.[3] A 1929 opinion of the Tennessee Supreme Court, issued in the case of Shields v. Williams and written by Chief Justice Grafton Green,[4] found that the Hall tax was a privilege tax, not a property tax.[3][5] This meant that the Hall tax was not subject to a provision of the state constitution requiring all property to be taxed uniformly.[3]

At first the tax rate was 5% and all collected revenue was directed to the state government.[3] In 1931 the General Assembly amended the law to require that 45% of the revenue be distributed 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.[3]

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 government share at 2.25 percentage points of the taxable income reported by the local jurisdiction's residents.[3] These rates remain in effect as of 2014.

In 2002, the Tennessee Department of Revenue established an electronic filing system for the Hall income tax and ended its former practice of mailing tax forms to taxpayers believed to be subject to the tax.[6]

Applicability

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 at least six months of the year.[7]

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.[7] 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.[7]

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.[8] Some interest and dividend income received by quadriplegics also is exempt.[9]

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 $3000 in fines.[10] The Tennessee Department of Revenue uses Internal Revenue Service data to assist in identifying taxable income that is not being reported.[11]

Revenues collected

The Hall income tax accounts for about 2% of Tennessee's state tax collections.[12] Revenue from the Hall tax peaked at $289.7 million in state fiscal year (FY) 2008, when almost 192,000 households paid Hall income tax based on returns filed for calendar year 2007.[12] Hall income tax collections totaled $213.9 million and $172 million for calendar years 2008 and 2009, respectively (paid in state FYs 2009 and 2010).[12][13] About 156,000 state households paid the tax in FY 2009 for income received in 2008.[12]

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.[3][12] 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 (TACIR) observed that capital gains from investments had displayed "roller-coaster behavior" over the preceding eight years. TACIR 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.[3]

Distributions to municipalities and counties

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.[14]

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.[3][14] 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.[3]

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.[3][15] The government of the City of Belle Meade receives over one-third of its revenue from the Hall income tax.[16] Other Tennessee municipalities identified as highly dependent on the tax, based on 1997 data, are Forest Hills, Allardt, Lookout Mountain, Slayden, and Walden.[3]

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.[17]

Criticisms and proposals for changes

The Hall income tax has been the subject of chronic criticism, primarily for being regressive and for having a negative impact on retired people. Periodically, there are legislative proposals for changing it, including eliminating it, replacing it with a general personal income tax, or changing the tax rates or exemptions. At times there also have been legislative proposals to enhance state government revenue by reducing the fraction of the Hall tax that is distributed to local governments; several such proposals were made in the late 1990s and early 2000s.[3]

Proposals for major changes to the Hall tax typically fail because of the lack of alternative sources of revenue to replace it. The Hall tax is Tennessee's only tax on personal income; the state does not levy a general personal income tax.[18][19] As of 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.[19] In decisions in 1932 and 1960, the court rejected proposals for a general personal income tax.[5][19] More recently, in 1981, 1991, and 1999, three different Tennessee Attorneys General issued opinions to the effect that a general income tax would not violate the state constitution.[20][21]

In December 2004, a commission established to study the state's tax structure criticized the Hall income tax as regressive, anti-competitive, and "unfairly selective."[22][23] Not all analysts agree about the tax’s regressivity, however. The Institute on Taxation and Economic Policy (ITEP) has found that the Hall 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.[24] The Tennessee Tax Structure Study Commission characterized the tax as "particularly harmful to retirees with limited income derived mainly from investments,"[22] noting in its final report that low-income retirees with dividend and interest income pay the tax, but low-income people with income from other sources do not.[23] The commission's report also asserted that the Hall tax "effective (sic) encourages retirees to leave the State." [23] The commission recommended repealing the Hall income tax, reducing or repealing certain other state taxes, and enacting a general personal income tax in their place.[5][25] Other critics have suggested that the tax discourages people from saving and hinders efforts to encourage retirees to settle in Tennessee.[26] 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 implementation of a broad-based personal income tax.[26][27] In its "Legislator's Guide to the Issues" issued in 2009 and 2011, the Tennessee Center for Policy Research called the 6 percent rate "sizeable" and said the tax "makes Tennessee an unwelcoming place, particularly for retirees and the wealthy." The organization advocated repealing the tax "to encourage wealthy and retired individuals to move to Tennessee" and cutting state spending to offset the lost revenue.[28][29]

In May 2011 the General Assembly passed a measure, sponsored by Speaker Ron Ramsey in the Senate and Representative Cameron Sexton of Crossville in the House, to increase the income exemptions for persons over 65 by $10,000, to $26,200 for individual taxpayers and $37,000 for joint filers.[30][31] That change is expected to make an estimated 4,725 taxpayers eligible for the exemption, reducing Hall tax revenue by about $1.65 million, including $1 million for the state and $650,000 for local governments.[30][32] 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.”[30] This was the only bill to pass from among the eight bills to reduce or eliminate the Hall tax that were introduced in the General Assembly in 2011.[30] Representative Sexton and State Senator Charlotte Burks of Monterey sponsored a proposal to phase out the Hall tax by reducing the rate each year until 2015, when it would be reduced to 0%. Both of the bill's sponsors represent Cumberland County, the location of retirement communities including Fairfield Glade and Lake Tansi. In explaining his rationale for the bill, Sexton said that his goal was to protect senior citizens in these and other retirement communities from being "penalize[d] ... at the end of their lives when they're trying to live on a fixed income."[26][33] Another legislative proposal in 2011, sponsored by Senator Jack Johnson and Representative Charles Michael Sargent, both Republicans from Franklin, would increase the amount of a taxpayer's interest and dividend income that is exempt from the Hall tax, eventually making the first $2,500 ($5,000 for persons filing jointly) nontaxable.[26][34]

References

  1. ↑ T.O. Trotter, The Tennessee Income Tax Law of 1929, Tennessee Law Review 106 (1929-1930)
  2. ↑ Diane Black, Tennessee Senators, Territorial General Assembly 1794 to 106th General Assembly, 2009-10, Tennessee State Library and Archives. (List shows that Hall was a Democrat representing the 23rd District, including Dickson, Houston, Humphreys, and Stewart Counties.)
  3. 1 2 3 4 5 6 7 8 9 10 11 12 13 Stanley Chervin and Harry A. Green, Hall Income Tax Distributions and Local Government Finances, Tennessee Advisory Commission on Intergovernmental Relations, April 2004
  4. ↑ 159 Tenn. 349 (1929)
  5. 1 2 3 Rose M. Naccarato (2006), OPTIONS FOR TENNESSEE’S TAX SYSTEM: A PROSPECTIVE PORTFOLIO ANALYSIS, Dissertation, Graduate School of Vanderbilt University, August 2006
  6. ↑ Procedures for Filing the Income Tax Return, Tennessee Department of Revenue, November 2001.
  7. 1 2 3 Frequently Asked Questions: Individual Income Tax, Tennessee Department of Revenue website, accessed May 1, 2011
  8. ↑ http://www.tn.gov/revenue/tntaxes/indinc.shtml , Tennessee Department of Revenue website, accessed March 7, 2015
  9. ↑ Guidance for Tennessee's Individual Income Tax Return, Tennessee Department of Revenue website, accessed May 16, 2011
  10. ↑ Old Hickory Resident Arrested for Income Tax Evasion, Tennessee Department of Revenue press release, March 12, 2010
  11. ↑ Anita Hamilton and Mark Worthington, State Tax Liaison Meeting, Tennessee CPA Journal, July 2008. Pages 6-7.
  12. 1 2 3 4 5 Richard Locker, Income tax does exist in Tennessee; Levy targets 'unearned' returns on investments, Memphis Commercial Appeal, March 8, 2010
  13. ↑ Cutting Hall Income Tax could hit city budgets in Tennessee, WATE-TV, January 25, 2011
  14. 1 2 Harry A. Green, State Tax Sharing, Fairness, and Local Government Finance in Tennessee, TACIR staff report, January 2004
  15. ↑ Associated Press, Cutting Hall Income Tax could hit Tenn. budgets; Sullivan near top of the list in collections, published by Kingsport Times-News Online, January 25, 2011
  16. ↑ Hall Income Tax, Newsletter to Residents, City of Belle Meade, March 2011. Page 1.
  17. ↑ Tom Humphrey, Listing of Revenue to Local Governments From Hall Income Tax, Knoxville News Sentinel website, January 26, 2011
  18. ↑ The Facts on Tennessee's Tax Climate, The Tax Foundation website, accessed May 1, 2011
  19. 1 2 3 Walter P. Armstrong, Jr. (1974). Constitutional limits on income taxes in Tennessee. 27 Vand. L. Rev. 475
  20. ↑ The Income Tax IS Constitutional, Tennesseans for Fair Taxation website, 2008; accessed May 8, 2011
  21. ↑ Maclin P. Davis, Jr., THE CONSTITUTIONALITY OF THE PROPOSED TENNESSEE INCOME TAX, Tennessee Tax Revolt, Inc. website, accessed May 8, 2011
  22. 1 2 Final Report of the Tennessee Tax Structure Study Commission, December 2004, page 6 of 118.
  23. 1 2 3 Final Report of the Tennessee Tax Structure Study Commission, December 2004, page 37 of 118.
  24. ↑ Who Pays: Tennessee State & Local Taxes, Institute on Taxation and Economic Policy, January 30, 2013
  25. ↑ Final Report of the Tennessee Tax Structure Study Commission, December 2004.
  26. 1 2 3 4 TFT: Replace Hall Tax with ‘Broad Based Tax on Income with Generous Exemptions and Modestly Graduated Rates’, Tennesseans for Fair Taxation press release, January 28, 2011, published by Tennessee Report.
  27. ↑ League of Women Voters of Tennessee (2009), Rationale for LWVTN Support of Tax Modernization and Fiscal Stimulus Act, SB 2054 Tate, HB 2182 Turner, accessed May 17, 2011
  28. ↑ Drew Johnson, Shaka Mitchell, and Justin Owen (2009), 106th Tennessee General Assembly Legislator's Guide to the Issues, Tennessee Center for Policy Research, Nashville.
  29. ↑ Justin Owen, Allyn Milojevich, and Jourdon Causseaux (2011), 107th Tennessee General Assembly Legislator's Guide to the Issues, Tennessee Center for Policy Research, Nashville.
  30. 1 2 3 4 Chas Sisk, Hall tax break would help senior citizens, The Tennessean, May 8, 2011
  31. ↑ Tom Humphrey, Tennessee legislators pass bills to give tax breaks, Knoxville News Sentinel, May 23, 2011
  32. ↑ Tom Humphrey, Haslam Backs Hall Income Tax Break for Those Over 65, Knoxville News Sentinel, May 8, 2011
  33. ↑ Erik Schelzig, Hall Income Tax Cuts Would Slash Local Government Revenues, Humphrey on the Hill blog, Knoxville News Sentinel website, January 26, 2011
  34. ↑ Raising Hall Income Tax Exemption Amounts, Tennessee Leger, January 24, 2011
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