In 1870, the Tennessee State Constitution was amended to give the General Assembly the legislative power to “levy a tax on income derived from stocks and bonds that are not taxed ad valorem.”
In 1929, Tennessee state Sen. Frank S. Hall introduced a bill to tax interest and dividends income from investments. It was challenged in court and the Tennessee Supreme Court found the Hall tax was a privilege tax, not a property tax.
Originally, all the revenue generated by the tax was retained by the state government. In 1931, the General Assembly amended the law to share a portion of the Hall Income Tax revenue with local governments. In 1937, income tax was increased from 5% to 6% and the amount shared with local governments was reduced to three-eighths of the total revenue collected by the state government and shared with local governing bodies where the taxpayer resides.
Fast forward to 2016, the General Assembly reduced the Hall Income Tax to 5% and on April 26, 2017, Gov. Bill Haslam signed into law The IMPROVE Act which provided a reduction in the Hall Income Tax each year beginning in 2017 and a full repeal of the tax in January 2021.
For the year 2019 the 90-year-old Hall Income Tax rate is 2% on taxable dividends and interest on bonds and notes. In 2020, it will be 1%. In 2021, it will be zero. The tax generated $303.4 million and a total of $105.5 million was shared with city and county governments from tax collections for the fiscal year 2015.
The significance of the full repeal of the Hall Income Tax is two-fold. First, the amount collected and shared with local governments has decreased each year beginning in 2016. The shared amounts from the previous year's state tax collection are remitted to local governments by the end of July and received in August. When revenue to local governments begins to decline regardless of the source, local governments look at other sources to make up the lost revenue. If sales tax revenue in the community is growing, local governments may postpone raising the property tax.
Second, one of the primary sources of local government's revenue is the property tax. In Johnson City, the 2015 shared amount of the Hall Income Tax received from the state before the reduction was $858,159. The following year the amount was $1,190,390 and in 2017 the amount was $889,924. In 2018, the share amount was $777,990. (Note: There is a one-year lag with the revenue shared, i.e. the amount for 2016 received by Johnson City was the shared amount collected by the state from residents in Johnson City during 2015).
Washington County's share of the Hall Income Tax has also declined each year, along with neighboring cities and counties. In Washington County, the 2015 shared amount of the Hall Income Tax received from the state was $648,592. The following year the amount was $228,183 and the amount in 2017 was $206,722. In 2018 ,the shared amount was $195,900.
The amount shared with Johnson City and Washington County from Tennessee Department of Revenue will eventually be zero.
How do local governments replace a lost revenue source? Local governments in Northeast Tennessee will and have increased the property tax to make up for the lost revenue of the Hall Income Tax from the state. Elizabethton recently adopted a property tax increase partly due to the lost revenue from the Hall Income Tax.
Most cities and counties in upper Northeast Tennessee have proposed to raise the property tax rate for their citizens for the coming year. In Johnson City and Washington County, the commissioners have decided not to raise the property tax for the coming year. Instead, both governing bodies have decided to use their fund balances to make up for necessary revenue to balance their budgets. Unfortunately, the expenditures both commissions have decided to fund are reoccurring expenditures.
When you have reoccurring expenditures (meaning they must be funded each year forward) you reduce your fund balance each year unless you raise the property tax or find a revenue source that is also reoccurring. All this does is move the inevitable of raising property tax down the road. The only other choice would be to reduce or eliminate some expenditure or service provided to the residents.
The public is better served when the property tax increases are small each year. Both commissions should have raised the property tax 2, 4, or 6 cents to help cover those reoccurring expenses. By using the fund balance to fund reoccurring expenses, both commissions will have to raise the property tax next year, especially if the other sources of revenue become more stagnant than they are already.
When Rusty Crowe, Matthew Hill and Micah Van Huss, representing taxpayers in Washington County, voted to eliminate the Hall Income Tax, the overall effect was to shift the tax from those who are more affluent to those who are less affluent. Many in the middle class or lower income Tennesseans do not own stock nor do they have any taxable interest.
The wealthy residents in Tennessee who received taxable dividends or interest made off like bandits. Middle income residents will end up making up the lost revenue by paying more property tax. That includes both city and county property taxes, so it is a DOUBLE hit on the property taxpayer who resides inside the city limits.
For example, then Governor Haslam (net worth about $1.9 billion, one of the wealthiest families in Tennessee) saw his taxes drop dramatically. Wealthy residents usually receive a large amount of their revenue from investments which usually pay dividends on stock owned. It has been reported that Governor Haslam's Tennessee Hall Income Tax was over $100,000 per year. With the repeal of the Hall Income Tax in January 2021, Haslam's tax will be zero. His signature on that legislation benefitted him and his family more than anyone else in Tennessee. The Haslam family is reported to be worth more than $6 billion. Are the three legislators looking after your interest in the same way as they take care of the wealthy? The answer is NO!
Monday: Part 2 of the Tax Shuffle will examine the effect of The IMPROVE Act on the middle- and low-income residents of Tennessee.
Ed McKinney of Johnson City is a retired business teacher.