Properly managing a state costs money. Schools, roads, emergency services, infrastructure improvements, parks and state employees all require a sizable amount of funding. Most states levy taxes on property, income, and sales of consumer goods. Often states hit consumers with higher than average taxes on alcohol, tobacco, and in some cases, gas. There are, however, seven states that don’t tax income, and Tennessee is looking to join the party. While this may seem like great news, the real question arises—without any personal income tax, where will Tennessee seek revenue? Sales taxes? Property taxes? Franchise or excise taxes?
Eliminating Tennessee’s Income Tax
While Tennessee doesn’t tax income in the literal sense, the state does have what is called the Hall Tax. With the Hall Tax, Tennessee taxes income derived from interest and dividends. Basically if you have earnings from your investments, the state taxes them. Tennessee, however, is proceeding full steam ahead in repealing this tax on investments.
In 2015, Tennessee generated over $300 million from it’s Hall Tax. Of this, about a third went directly into the coffers of cities and counties, with the majority flowing directly into the state’s $24 billion budget. When Tennessee’s governor signed the law to repeal the Hall Tax, he immediately dropped the tax from 6% to 5%, with designs to reduce it by 1% annually until it would be fully phased out at the beginning of 2021. When this happens, Tennessee will join seven other states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) that do not tax individual income.
Tennesseans are split on the Hall Tax repeal. Some argue that it will cut much needed revenue for state programs, while others point out that Hall Tax collections accounted for less than 2% of Tennessee’s budget. One need only look to other states with zero income tax to see what happens when income taxes disappear.
Tennessee Already Has High Sales Taxes
“No income tax” states have to get their money from somewhere. Nevada taxes gambling. Alaska hits oil and gas revenues. Florida and Texas levy hefty taxes on property. Washington has one of the highest taxes on gas. So how about Tennessee?
Tennessee has the highest sales tax in the US, bordering on 9.5% in some areas. The point is, a state may not tax income on the front end, but they will tax income on the back end with regards to consumption.
Tennessee’s Hall Tax Repeal Could Result in Higher Property Taxes h2
As the Hall Tax has decreased in the last few yeas, some cities have responded by raising property taxes to recoup revenue for municipal services. In 2017, Lookout Mountain’s revenue dropped to $477,145, down almost $100k from the year before. To combat the loss of revenue, the town raised the property tax rate from $1.83 to $1.89 per $100 of assessed value. Or consider Signal Mountain. In