Tennessee’s Governor Lee Pushes to Clear Out Remnants of Income Taxation

February 10, 2020

Tennessee Governor Bill Lee’s 2020 budget proposal includes cutting in half what’s left of Tennessee’s privilege tax. Lee’s plan would continue the trend of Volunteer State leaders scrapping all forms of income taxation. This change would further simplify Tennessee’s tax code and make it more neutral and pro-growth.

Tennessee’s privilege tax is a $400 tax on certain professionals who are licensed or registered to practice in the state. Last year, Gov. Lee (R) signed legislation that removed 15 occupations from Tennessee’s privilege tax completely, leaving only a handful of occupations that are still subject to the tax. The $400 annual tax currently remains for attorneys, securities agents, broker-dealers, investment advisers, lobbyists, osteopathic physicians, and physicians. Lee’s proposal would cut the tax to $200 per worker in those occupations.

Tennessee has been progressively removing the remnants of income taxation from its tax code. In November 2014, Tennessee voters approved a legislatively-referred constitutional amendment to prohibit income taxation on wages and salaries. That amendment left the state the ability to tax income from stock dividends and bond interest (via the Hall tax) and privileges (via the Professional Privilege Tax).

Prior to 2016, the Hall income tax rate was 6 percent on stock dividends and bond interest. In 2016, Tennessee lawmakers passed a bill that was signed by then-Governor Bill Haslam (R) to reduce the Hall tax rate to 5 percent. Then in 2017, the legislature passed another bill, also signed by Haslam, to phase out the Hall tax by reducing the rate to 4 percent in 2017, 3 percent in 2018, 2 percent in 2019, and 1 percent in 2020 before fully eliminating the tax beginning January 1, 2021.

With the Hall tax in the process of being phased out, lawmakers then sent Gov. Lee legislation to remove 15 occupations from the Privilege Tax in 2019, with Lee calling for a reduction in the remaining Privilege Tax rate in 2020. All-in-all, Tennessee is headed towards completely scrapping all forms of taxation on income and occupations.

The privilege tax is non-neutral in several ways. First, it targets a small number of occupations covering a minority of Tennessee workers, putting a disproportionate tax load on those occupations. Second, it disproportionately impacts those who only practice occasionally, or those who are from another state and only do a little work in Tennessee, or professionals who come to practice in Tennessee on a volunteer basis.

Tennessee’s solid economic growth, population inflow, and low tax burden have created the opportunity to further improve the competitiveness of the state’s tax code. And Tennessee policymakers have seized that opportunity by continually removing the remnants of income taxation from Tennessee’s code.

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