Tennessee to Vote for Permanent Ban on Income Tax

One of the important issues Tennesseans face on Election Day is whether to vote in favor of or against an amendment in the state constitution to ban income and payroll taxes. According to some tax attorneys, even if the resolution fails, the legislature is not likely to establish new taxes which is the last thing any American needs.

The move to ban income tax in perpetuity was sponsored by Republican state Sen. Brian Kelsey who is in charge of the ‘Yes on 3’ committee. According to the senator, Tennessee will be more fiscally responsible without income tax while a permanent ban would appeal to businesses and create more jobs in the state.

Double Taxation

The state’s constitution does not mention personal income tax but permits the government to tax property and income from stocks and bonds. Currently, a six percent tax on interest and dividends, known as ‘Hall tax’ is in force which is actually double taxation because money invested comes after anyone has already paid an income tax and this is against America’s constitution (everyone pays a federal income tax). However and moreover, it does not include income tax which does not mean that much since this tax is already high enough. In addition, there is a 7 percent sales tax. The state recorded the second lowest average per-capita state and local tax of $2,777 in 2011.

Until 1999, it was perceived that a ban on income tax was already in the state constitution. However, the same year, the state attorney general said that state could also adopt a regular income tax since it taxed income from interest and dividends. Later in 2001, Republican Don Sundquist, the governor at the time, pushed for an income tax of around four percent with a $7,000-per-person exemption. He also proposed a reduction in sales tax and a complete abolition of sales tax on food.

However, his efforts met with severe criticism from the public in 2002, which included demonstrations outside Nashville’s statehouse and a brick thrown at the window of the governor’s office. Amendment 3, the current push for an amendment is considered a direct result of former Governor Sundquist’s efforts to impose an income tax.

Art Laffer knows his business. He says that a state that does not impose an income tax on its citizens has a better economy than states that do.

Art Laffer knows his business. He says that a state that does not impose an income tax on its citizens has a better economy than states that do.

A Genuine Fear

Republican Sen. Rusty Crowe says that that a proposed general income tax has been challenged in the state’s highest court several times, and was ruled unconstitutional each time. Many tax lawyers and opponents of Amendment 3 are of the opinion that a personal income tax would limit the options in the future and reduce taxes overall. Some believe that passing of the amendment could lead to higher sales taxes or business taxes in addition to higher property taxes at the local level.

Higher Growth = Lower Taxes

Research by co-authors of Wealth of States Travis Brown and Dr. Art Laffer indicates that states that do not have personal income taxes have grown faster over the past 50 years in terms of economy and population. They are of the opinion that Tennessee could have a distinctive advantage by not imposing a personal income tax.  According to Brown, passing Amendment 3 will help the state on its path to prosperity.

Currently, seven states do not have an income tax while New Hampshire and Tennessee have no income tax but impose charges on interest and dividends. If the proposed amendment fails, the state’s residents are not likely to have to pay any new taxes on their income. With a Republican majority, the likelihood of any new taxes is very slim. Which is why Tennessee is not bankrupt like California, Illinois, and New York.