The Hall Tax

What changes to the Hall income tax mean for Tennessee taxpayers

The Hall income tax is a Tennessee state tax on interest and dividend income from investments. It’s the only form of personal income tax in the state. It’s been in the news lately because, after years of discussion, there’s now a plan to slowly roll back the tax until it’s eliminated in 2022.

The History

The Hall tax has been in effect since 1929 and was named after the state senator who sponsored it. The original tax rate was five percent and all revenue at the time went to the state government. In 1931, the law was changed, and the state began sharing 45 percent of revenue with local governments.

In 1937 the tax rate was increased to six percent and the portion allocated to local governments was reduced to 37.5 percent of total revenue, where it stands today. The Hall income tax accounts for only about two percent of Tennessee’s state tax collections. The local government portion goes to the municipality where the taxpayer lives and there are no restrictions on how local governments use the funds.

Although these payments are a relatively minor source of revenue for most local governments and the state, it is a big source of income for a few small municipalities, especially those with wealthy residents. This is one of the reasons many in the state consider the tax unbalanced and unfair.

Who Pays?

The Hall tax applies to people whose legal residence is in Tennessee, including anyone who lives in the state at least six months a year. It taxes interest and dividend income over $1,250 per person and $2,500 for married couples that file their taxes jointly. There are certain limits on this tax for people who are over 65 and those with handicaps.

Dividends subject to the tax include those from:

  • Corporations
  • Investment trusts
  • Mutual funds

Taxable forms of interest include interest on:

  • Bonds issued by corporations, churches, joint stock companies and business trusts
  • Bonds issued by U.S. states and local areas outside Tennessee and foreign governments
  • Mortgages, commercial paper, and other written obligations that mature more than six months after the date of issue

The tax does not apply to:

  • Income from bonds issued by the U.S. government and Tennessee state or local governments
  • Dividends from stock from banks and similar financial institutions
  • Income from investments in certain types of Tennessee businesses
  • Interest paid on bank and credit union accounts.

Changes Ahead

The Hall income tax has been under fire for a long time. Many in the state feel it’s regressive and may have a negative impact on retired people. There have also been concerns that the tax keeps wealthy people from moving to Tennessee. They often choose to live in states in the region with more favorable tax policies for wealthy investors.

Over the years, there have been countless legislative proposals for changing or eliminating the Hall tax. This year, the legislature passed a bill that reduced the Hall tax rate from six percent to five percent for tax year 2016. The bill also somewhat ambiguously states that it is the “ intent” of the legislature to reduce the tax by one percent annually beginning next year. The certain thing about the bill is that it will eliminate the tax entirely in 2022, whether the incremental annual reductions take place or not. If this happens as planned, Tennessee will become one of seven states with no state personal income tax in 2022.

The Impact

According to experts, when the tax is completely eliminated in 2022, it could put more than $5,000 per year back into the pockets of the top one percent of Tennessee residents in terms of income. It’s expected that a percentage of this will be spent or invested in the state, which will generate new tax revenue to replace some lost by the repeal.

Over time, it’s expected that this change will attract more wealthy residents to the Tennessee, who will in turn invest in the state and local communities. Long term, many believe that this will have a big enough impact on the amount of revenue generated in the state that can be taxed to more than make up for the two percent of tax income the state will lose because of the Hall tax repeal.

An experienced tax advisor can answer any questions you might have about the elimination of the Hall tax and how it could affect your personal or business tax situation.