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Lawmakers in Tennessee will debate a bill today (SB 47) that would gradually eliminate the Hall Tax, Tennessee’s limited income tax on interest and dividends that generates about $341 million per year for public services in Tennessee. The bill would reduce the tax rate incrementally whenever state revenue growth exceeds 3 percent, until the tax is phased out altogether. As our newly updated report explains, this would be bad policy for the state of Tennessee for a number of reasons:
- In a state that already leans more heavily on its low-income families for tax revenue than all but six other states, slashing the Hall Tax would make this imbalance even worse. The richest 1 percent of Tennesseans would receive tax cut windfalls averaging more than $5,000 and making up 45 percent of the total. In contrast, the 95 percent of Tennesseans who have incomes below $173,000 per year would get only 14 percent of the benefit, receiving a $17 tax cut on average.
- To add insult to this injustice, $85 million, or 25 percent, of the total cut would actually flow to the federal government as Tennesseans lose the ability to write off their Hall Tax Payments on their federal tax returns and pay more to the federal government as a result. In fact, the richest 5 percent of Tennesseans would gain so much from the tax cut that they would lose more in federal write-offs than the bottom 95 percent would gain from the tax cut.
- Local entities would suffer as well, as Hall Tax revenues are shared with Tennessee counties and municipalities. SB 47 would hold these local governments harmless for the first few years, but they would eventually lose all of their Hall Tax revenue, which is currently about $119 million worth of city streets, local police officers, county roads, etc. per year. Once that revenue goes away, Tennesseans will either face cuts to those services or increases in their local property taxes. And of course, delaying the effect on local governments means speeding up the losses to the state budget.
As we highlighted in earlier blogs, this approach of cutting taxes in small increments based on automatic “triggers” is a growing trend across the states. Such proposals appear modest on the surface but are ultimately yet another way of undermining vital public services while placing an even greater share of the responsibility for funding those services on low- and middle-income families.