Tennessee Mulls Move from Bad to Worse on Tax Policy

Tennessee is already one of the ten most unfair states when it comes to tax policy. It is one of nine states that do not levy a broad-based personal income tax on their residents’ earnings (the state does collect a 6 percent tax on investment income from dividends, interest, and some capital gains income- see more below). Instead, the state relies heavily on regressive sales taxes to fund public services, and as a result the bottom 20 percent of Tennesseans pay four times as much of their income in state and local taxes as the top 1 percent. Sadly, instead of trying to create a more fair tax system, there are two efforts underway that would make a bad deal for working families even worse.

The first effort is Amendment 3, a ballot initiative (and political gimmick) that would permanently ban the state legislators from creating a broad state income tax. Never mind that any income tax bill has zero chance of passing, and that the last serious effort in 2002 ended in wild protests and bricks thrown through windows. The measure has many prominent cheerleaders, most notably the father of voodoo economics, pundit-for-hire and Nashville resident Art Laffer, and his sidekick Travis Brown. They claim that Tennessee’s economic success (43rd in unemployment rate, 30th in quality of labor supply, 40th in quality of life) is due to its “status as a no-income tax state.”  They see Tennessee as the vanguard of the “heartland tax rebellion,” a gaggle of shortsighted tax “reforms” pushed by Laffer and right-wing organizations in conservative states. Kansas was the poster-child until recent events caused the state to become a liability.

Amendment supporters also claim the measure will bring more jobs to Tennessee, since business owners would be absolutely certain there would never be any broad income tax imposed. As usual, the claim is made with no evidence or common sense; who are these fence-sitting job creators who refuse to set up shop in Tennessee because of the possibility of a new tax that isn’t even imposed on businesses? Perhaps supporters, who are making a clearly ideological choice, can’t conceive of any other way to make business decisions. 

Unfortunately for supporters, their claims are belied by pesky facts. John Stewart, an opponent of the measure and former state economic development official, asserts that he “never had one company raise the issue of income tax as to whether they were going to come or not. The one issue they always cared about was a skilled and trained workforce through our colleges.” Stewart notes that the measure will force future Tennesseans to pay higher sales, property, food and business taxes or cut services in order to balance the budget. A recent Standard and Poor’s report found that states without progressive income taxes will see revenues shrink due to growing income inequality.

The second effort is the ongoing fight to repeal the Hall tax, which taxes investment income from dividends, interest, and some capital gains income. Attempts to repeal the tax failed this year, so advocates – backed by the Koch brothers and Grover Norquist – will try again during the 2015 legislative session. An ITEP analysis found that nearly two-thirds of the benefits from repealing the Hall tax would go to the wealthiest Tennesseans – those earning an average of $970,000 a year. The next largest beneficiary would be the federal government, since investors would no longer be able to write off Hall tax payments on their federal returns.

The losers from the repeal of the Hall tax would be ordinary Tennesseans, who would see state and local spending decrease or other taxes increase. Last year, the tax generated $264 million in revenue, three-eighths of which went to local jurisdictions. The plan to repeal the Hall tax would require the state to reimburse cities and counties for any revenue losses, but doesn’t specify where the money would come from. An editorial in the Knoxville News-Sentinel gets it right: “Without new revenue sources, the state would have to cannibalize other parts of its perpetually lean budget….Repeal of the Hall tax at this time without finding alternative revenue sources does not make sense for the state, for local governments or for the people of Tennessee.”

Tennessee’s blind, ideological pursuit of tax cuts has prevented the state from making crucial investments that would actually make the state more competitive. Tennessee ranks 40th in teacher pay, yet the most recent state budget was passed without promised raises for teachers and state employees. Proposed higher education spending was also eliminated, meaning college students will see tuition jumps. The idea that states can cut their way to prosperity – despite the evidence all around us – is alive and well.