In the same week Americans from coast to coast scrambled to get their taxes filed by the April 18 deadline, legislatures of two southern states bordering one another – Tennessee & Mississippi – passed major tax reform packages that make their tax codes more competitive and will provide welcome relief to taxpayers.
It is often stated there are nine no income tax states. Yet two of those nine, Tennessee & New Hampshire, need an asterisk next to their name on that list. While while those two states do not tax wage income, they do tax investment income. Tennessee levies a 6.0 percent tax on dividend and interest income, referred to as the Hall Tax.
Yesterday, April 22nd, Tennessee lawmakers gave final approval to legislation that will make Tennessee one of eight true no income tax states, cutting the Hall Tax rate from 6.0 to 5.0 percent this year and fully phasing out Tennessee’s last remaining tax on income by 2022.
The vote to phase out the Hall Tax is the biggest victory for Tennessee taxpayers this session,” said Justin Owen, CEO of the Beacon Center, a free market think tank based in Nashville. “We applaud legislators for their leadership, especially the bill's sponsors, Sen. Mark Green and Rep. Charles Sargent. They realized that this tax unfairly hurts senior citizens and job creators and did the right thing to repeal it.”
According to the non-partisan Tax Foundation, Tennessee will see its state business tax climate ranking improve from 15th to the nation’s 11th best by eliminating the Hall Tax. The phase out now heads to Gov. Bill Haslam (R). Enactment of the Hall Tax phase out would add to an impressive record of pro-growth tax reform in Tennessee since Gov. Haslam took office in 2011.
If the repeal is signed into law, the Hall Tax would be the second form of double taxation that Tennessee has repealed in recent years. A phase out of the state’s death tax passed by Tennessee legislators in 2012 was fully completed at the end of 2015. In 2014, Volunteer State lawmakers referred a constitutional amendment to the ballot that was ultimately approved by voters prohibiting the enactment of a state income tax.
The Tax Foundation chart below shows how, for all the harm the Hall Tax does to the more than 200,000 retirees, savers, and investors who pay it, more than half of whom make less than $75,000 per year, the tax doesn’t bring in that much revenue for state and local governments, accounting for less than one percent of total revenue.
Four days before Tennessee lawmakers put the Hall Tax on the path to elimination, their counterparts in the Mississippi Legislature approved the Taxpayer Pay Raise Act, which improves the Magnolia State’s tax code in the following ways:
- Eliminates the bottom 3.0 percent tax bracket levied on the first $5,000 of income.
- Phases out the franchise tax paid by Mississippi businesses over the next ten years.
- Allows self-employed Mississippi residents to deduct half of their federal self employment tax burden
Mississippi Lt. Gov. Tate Reeves (R), who has been a longtime proponent of getting rid of the franchise tax and providing income tax relief, expressed the importance of this week’s vote:
A flatter, fairer tax policy can grow the economy of our state and make Mississippi-grown businesses more competitive in the global marketplace,” Lt. Gov. Reeves said. “I am proud the Legislature has given Mississippians the opportunity to keep their hard-earned dollars in their pockets to spend at home.”
By eliminating the franchise tax over the next ten years, Mississippi lawmakers are removing a significant impediment to growth. Few states levy a franchise tax, putting those that do at a competitive disadvantage.
Franchise taxes are widely viewed by economists and tax policy experts as one of the most economically damaging forms of taxation. David Brunori, professor of public policy at George Washington University and Forbes contributor, has written about why franchises taxes are so harmful, particularly in Mississippi:
The Mississippi [franchise] tax is essentially a tax on capital. That is ludicrous in a global economy. Companies in Mississippi pay $2.50 per $1,000 of capital or property, whichever is greater. There is no limit. The more capital employed, the higher the tax,” writes Brunori.
Franchise tax elimination will increase the job-creating capacity of Mississippi businesses, and make the state more attractive to employers and investors. Meanwhile, the income tax cuts approved in Jackson this week will allow individuals and families across the state to keep more of their hard-earned income, as it will for the hundreds of thousands of Mississippi small businesses that pay under the individual income tax system.
The tax changes passed in Tennessee and Mississippi are the latest in a series of pro-growth tax reforms approved by southern states in recent years. Texas Gov. Greg Abbott enacted $4 billion in tax cuts on businesses and property owners last year. Florida Gov. Rick Scott (R) has signed $3 billion in tax cuts into law since taking office. Arkansas enacted income tax relief last year. And North Carolina lawmakers, who passed income tax rate reducing tax reform in 2013 and 2015 that improved their business tax climate ranking from 44th to the nation's 16th best, recognize they can’t rest on their laurels and plan to pass further tax relief during the 2016 legislative session that starts on April 25th.
The tax cuts passed in Mississippi & Tennessee this week now head to the desks of Gov. Phil Bryant (MS-R) and Gov. Haslam. While action at the federal level is held up until after November elections, states continue to both discuss and pass meaningful tax reform.
Patrick Gleason is director of state affairs at Americans for Tax Reform and a senior fellow at the Beacon Center of Tennessee. Follow Patrick on Twitter: @PatrickMGleason
