States act on tax reform
The United States needs tax reform — and soon. Our corporate tax rate is 35 percent, while the European average is 25 percent. We are not competitive. Our individual tax code has rates too high and too many politically driven tax credits and deductions. All true. But it’s also likely that no real tax reform will move in Washington for the next three years.
Why? Because the Democrats,who control the White House veto pen, oppose any reform that does not include at least $1 trillion in higher taxes on net and the Republicans, who control the House of Representatives, will never vote for such a tax hike.
In Washington we have three years of guaranteed gridlock ahead. But in 37 of the 50 states there is unified government — the opposite of gridlock.
Republicans have the governorship and total control of the legislature in 24 states, while Democrats hold complete political control in 13 states. This means that in many state capitols, Republicans and Democrats are able to carry out their preferred policy solutions alone. No partisan bickering. No “party of no.”
This dynamic is on display in Tennessee, one of the nation’s nine “no income tax” states. Tennessee, like other states with no income tax, has benefited greatly from its relatively hospitable tax climate.
From 2002 to 2012, the nine states with no personal income tax experienced average gross domestic product growth 39 percent greater than the nine states with the highest marginal rates. These no income tax states also outperformed the national rate of economic growth by more than 25 percent over the past decade.
Taxpayers are voting with their feet in favor of no income tax states. Average population growth among the nine no-tax states over the last decade was 149 percent higher than in the nine highest income tax states.
Yet as much as Tennessee benefits economically and from a marketing standpoint to be among the nine no income tax states, an asterisk should be placed next to its name on that list. For it taxes investment income.
Known as the Hall Tax (for Frank Hall, the state senator who championed it in 1929), Tennessee imposes a 6 percent tax on income earned from dividends and interest. During a recent news conference at the state capitol in Nashville, though, lawmakers unveiled a consensus bill that would phase out the Hall Tax over a six-year period.
Opponents may portray this as a tax cut for “the rich.” But the majority of Tennessee residents who receive dividend income (more than 57 percent) are from households making less than $75,000 annually, according to IRS data. Forty percent of Tennessee dividend earners make less than $50,000.
States are using tax policy more aggressively to compete for investment, businesses, people and the jobs they create. Money and people are moving from high tax states to low tax states. Travis Brown, the author of How Money Walks, analyzed Internal Revenue Service data and found that nearly $2 trillion in income and 43 million Americans have migrated between states over the past decade.Tennessee can no longer hang its hat on what has historically been a relatively low tax burden. Other states are moving down the Laffer Curve.
Consider North Carolina. After the Republican legislature’s pro-growth tax overhaul, the Tar Heel State can now boast a lower tax rate on dividends and interest. Besides beautiful beaches, North Carolina now has another major advantage over Tennessee, its neighbor to the east, when it comes to attracting retirees who live off investment income.
Other states — including Wisconsin, Kansas, Oklahoma, Nebraska, Louisiana, Arizona, even no income tax Florida — are moving to reduce taxes further.
So Tennessee legislators, rather than rest on their laurels and watch other states catch up, should step on the fiscal gas pedal and make the state even more competitive.
If Tennessee did away with its tax on investment income, according to the nonpartisan Tax Foundation, the state would go from having the nation’s 15th best business tax climate to the 11th.
Tennessee needs to begin phasing out the Hall Tax this year. The revenue it generates amounts to 1.3 percent of Tennessee’s $11.8 billion general fund and 0.9 percent of total state and local revenue collections. It does far more economic harm than it’s worth.
Tennessee took a big step toward being as competitive as possible when state lawmakers voted to phase out the state death tax in 2012. The Hall Tax is now the main obstacle left in the state tax code preventing Tennessee from reaching its full economic potential. It’s time for legislators in Nashville to begin removing that obstacle in 2014.
PHOTO (TOP): A car passes a sign advertising tax return services in Falls Church, Virginia, April 8, 2010. REUTERS/Kevin Lamarque
PHOTO (INSERT): Tennessee State Capitol in Nashville, Tennessee. Credit: Tennessee.gov
PHOTO (INSERT): North Carolina Republican Governor Pat McCrory during the Economic Development and Commerce Committee meeting at the National Governors Association Winter Meeting in Washington, February 22, 2014. REUTERS/Mike Theile