It’s not breaking news that partisanship has gridlocked Congress these last few years, and most policy change has occurred at the state level. State legislatures have debated and enacted laws affecting issues as varied as minimum wage, infrastructure investment, education, environmental protection, and voting rights.
National groups seeking to cut taxes for the wealthy are well aware that policy change in states may be their best bet right now, and they’ve set their sights high. Grover Norquist’s Americans for Tax Reform, as well as Koch brothers-backed Americans for Prosperity and other conservative groups, continue to advocate for full repeal of state income taxes, with an eye toward setting a national trend in motion.
So far, most proposals to do away with state income taxes have run into a brick wall called reality after legislators learned that repeal would mean damaging cuts in public investments and significant tax hikes on the poor and middle-class. Proposals for income tax repeal recently failed in Louisiana, Missouri, Nebraska, North Carolina, and Oklahoma. The only state in U.S. history to repeal its personal income tax is Alaska, which threw out the tax in the 1980s when it was awash in newfound oil tax revenues.
Now it seems anti-tax proponents have found a test case in Tennessee. The Volunteer State has a regressive tax code built mainly around the sales tax. Unlike most states, it doesn’t have a general income tax on salaries and wages. But it does levy the Hall Tax, a modest 6 percent assessment on investment income that largely falls on wealthy Tennesseans with large stock portfolios. In recent months, a number of right-wing groups have spent significant resources backing a bill that would repeal this tax.
These groups are toeing their typical line, saying repeal will make Tennessee “economically competitive.” But the mediocre experiences of states that have recently cut income taxes don’t support that assertion.
Moreover, the vast majority of Tennesseans don’t pay the Hall Tax. The law exempts business income, wages, pensions, Social Security, and most other types of income Tennesseans earn. Only people with more than $2,500 in dividends, interest, and certain capital gains pay anything at all. Low- and moderate-income residents over age 65 are entirely exempt.
Given the Hall Tax’s limited scope, it generates only about 1 percent of the state’s revenue, making it low-hanging fruit for tax repeal advocates who have met with failure in states where personal income taxes generate significantly more revenue.
While repealing the Hall Tax could yield fruit for the no-tax agenda, it’s not in Tennesseans’ best interest. My colleagues and I at the Institute on Taxation and Economic Policy produced an analysis that found the top 5 percent of earners would receive a whopping 63 percent of the benefits of the tax cut. Another 23 would go to the federal government because residents who pay the tax would no longer be able to write-off those payments on their federal tax returns. The remaining 14 percent of revenue lost by the cut would be spread thinly among the bottom 95 percent of households.
Although most ordinary working Tennesseans would see no benefit to their pocketbooks, they certainly would see the effect on state and local budgets. The $260 million revenue loss resulting from Hall Tax repeal would require Tennessee to scale back investments in education, infrastructure, and other services vitally important to the state’s success. Local communities would be hit particularly hard since more than one out of every three dollars generated by the tax goes to local government budgets. And if communities respond to this revenue loss by increasing property taxes, many Tennesseans could see their overall tax bills rise under this so-called “tax cut.”
The vagaries of Tennessee legislation may seem inconsequential for people outside the Volunteer State. But anyone concerned about how states and local governments fund basic services should be worried that national anti-tax groups have set their sights on repealing the Hall Tax. Tennessee isn’t this train’s first stop, and it won’t be the last.