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Tennessee Legislature’s Effort to Drive a Stake Through the Heart of Wage Taxation Passes Senate

2 min readBy: William Ahern

The roster of states that refuse to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. wages stands at nine out of fifty, as it has for almost 20 years. (Connecticut joined the wage-taxers in 1991.) Among those nine states, Tennessee is the one that has come closest to adopting a wage tax.

The year was 2002, during the last recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. , and the political parties did not align predictably. Facing a budget crisis that had shut down state government on July 1, Republican governor Don Sundquist favored the new wage tax, but the Democrat-controlled state legislature wouldn’t give him one. Reporter Michael Wilson at The New York Times set the wild Independence Day scene.

Tennessee’s reaction to the most recent recession and its attendant budget problems has been much different. Instead of a nearly successful effort to tax wages, the legislature is pushing to amend the constitution to make such an enactment nearly impossible.

As reported by State Tax Today (subscription), the state senate has voted by 25 to 7 to approve SJR 763, which would amend the constitution to prohibit a state income or payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. . Next step is a vote in the House Budget Subcommittee, and even then it would have to be approved by the 107th General Assembly, which meets in 2011 and 2012, before being referred to voters in 2014. A long process suited to constitutional amendments.

As colleague Joe Henchman pointed out a couple weeks ago, Tennessee’s courts have repeatedly ruled that the state legislature already has no power under the state constitution to enact a wage tax, but considering how close it got eight years ago, the current effort to make the constitution more emphatic on the matter may be understandable.

Technically, Tennessee already has an income tax, but it only applies to investment income from dividends and interest, most of which flows to the wealthiest people. The new effort to make wage taxation clearly unconstitutional protects this pre-existing tax on investment income.

Tax Foundation has more info on Tennessee.