Note: This story was last updated at 9:30 p.m.
Oak Ridge could lose $500,000-$700,000 per year in revenues if the repeal of the Hall income tax is approved, Oak Ridge City Manager Mark Watson said last week.
If Governor Bill Haslam signs a bill that the state legislature passed Friday, the tax, which was enacted in 1929, would be eliminated in the 2022 tax year. Haslam has not said whether he will the sign the bill into law or veto it.
If it becomes law, the bill could cost Oak Ridge about $119,000 in the fiscal year that starts July 1, or about 1.25 cents on the property tax rate, Mayor Warren Gooch said Saturday. The legislation would reduce the Hall income tax on stock and dividend income from 6 percent to 5 percent in the 2016 tax year.
The tax would be reduced by 1 percent per year after that until it is eliminated by 2022.
The Hall income tax generated total revenue of $303.4 million in Tennessee in fiscal year 2014-15, and $105.5 million went to cities and counties, with the rest going to the state.
On Thursday, Watson said the amount dispersed to Oak Ridge varies between about $500,000 to $700,000 per year. State data shows Oak Ridge collected about $708,000 in 2015.
City officials say Oak Ridge would have to generate an additional $50 million to $100 million in new retail sales per year to collect enough sales tax to offset the lost revenue.
“We’ve made it clear to everyone the impact that it has if it goes away,” Gooch said. “That loss of revenue, given our current situation in the city, is hard to recover.”
“It’s a big hit,” Watson told Oak Ridge City Council members during a work session on Tuesday.
Municipal officials who opposed the bill in Tennessee have expressed concern that repealing the Hall income tax puts pressure on their property tax rates and makes them rely more heavily on sales tax revenues. In Oak Ridge, city officials have expressed concern that there was no “hold harmless” provision included in the bill for local governments. That provision would have made payments equivalent to the loss in revenue.
“Five years from now, you’ll basically have that revenue source gone,” Watson said Tuesday.
As originally proposed, the tax would have been reduced until it reached zero percent, but the phased reductions would have occurred only in fiscal years when state revenue growth exceeds 3 percent. However, that growth provision has been dropped. Several options were recommended and considered before the legislature passed the final bill on Friday.
“It is now a straightforward and simple reduction of 1 percent per year until the tax is eliminated,” said Tennessee Representative John Ragan, an Oak Ridge Republican. “There is no requirement for the General Assembly to approve the reduction annually.”
Oak Ridge officials object to change, have heard no complaints
Gooch has been raising the Hall tax issue since his 2014 campaign, and he has continued to stress the importance of the tax, which puts money into the city’s general fund.
“It has certainly been a reliable revenue source for the city,” Gooch said. “I’ve been talking about this for almost two years. Everyone understands my position.”
No one has objected to the tax or his position, Gooch said.
“I’ve not had one citizen of Oak Ridge ever tell me, Warren, I think you’re wrong on the repeal of the Hall income tax,” Gooch said. “Not one.”
That’s an issue the city staff has raised with Ragan and other legislators as well. Ragan has told city officials that he has received hundreds of emails supporting repeal of the Hall income tax.
“My email in general and within district (District 33), in particular has been very much (literally hundreds) in favor of the Hall tax repeal,” Ragan told Amy Fitzgerald, director of Oak Ridge Government Affairs and Information Services, in an April 20 email.
“I know the city’s position,” Ragan said. “But I cannot ignore the voters either.”
He said he represents all the residents of District 33 as much as he does the city staff. His district includes most of Anderson County. The other local legislators who represent Oak Ridge—senators Randy McNally and Ken Yager, and Representative Kent Calfee—also represent other Tennesseans as well, Ragan said.
City officials said they’re not sure who the hundreds of people supporting the repeal might be.
“We get just the opposite opinions expressed here, as Oak Ridgers know the importance of the funding source in our city budget, which helps support provision of municipal services and the schools,” Fitzgerald said in a response to Ragan.
Like Ragan, McNally, who is also an Oak Ridge Republican, said he has received phone calls and emails about the Hall tax.
But, for a variety of reasons, neither he nor Ragan have information on what percentage or number of those calls and emails came from within their districts. They also didn’t immediately have information on how many people pay the tax in their districts, Oak Ridge, or Anderson and Roane counties.
Oak Ridge Mayor Pro Tem Ellen Smith and City Council member Kelly Callison were briefly interviewed about the tax reduction and repeal after a Community Matters forum at Oak Ridge High School on Sunday.
“It’s a huge problem for us,” Callison said. “We’re going to make it up…or make some really hard decisions about what to cut.”
It’s a huge amount of money to offset, and even the redevelopment of the former Oak Ridge Mall (the new Main Street Oak Ridge) won’t be enough to make it up, Callison said.
Smith also expressed concern.
“I’m disappointed in what the legislature has done,” she said.
The accountability of elected officials is not just about not raising taxes, Smith said. It’s also about ensuring there is sufficient revenue for public needs.
“They’re choking off revenue sources for both the state and local governments,” Smith said.
No one likes taxes, she said, but that’s how society develops resources for public needs, she said.
Smith said she herself pays the Hall tax, and she believes it is needed.
Like Gooch, Callison and Smith said they have received no complaints about the tax. But Callison pointed out that City Council doesn’t control that tax, so people might not have had a reason to complain to Council about it.
Why support the tax repeal?
Municipal officials expressed their concern about the Hall income tax legislation during a December meeting between the Oak Ridge City Council and four local legislators: McNally, Ragan, Yager, and Calfee.
The issue came up again on Monday morning during a Breakfast with the Legislators hosted by the League of Women Voters of Oak Ridge.
McNally, a longtime legislator, recalled that the issue was raised at an AARP meeting during his first campaign.
On Monday, he said the tax mostly falls on the elderly who have saved money for retirement.
“It fell a lot on the elderly,” McNally said.
Tennessee tells people it doesn’t have an income tax, but it does, McNally said. The Hall tax could affect the recruitment of retirees who don’t place a burden on cities and counties, he said.
Tennessee officials have already gotten rid of the inheritance and gift tax and reduced the sales tax on food, he said.
He said the Hall income tax is highly volatile, and cities and counties, who expect to lose money through its reduction and repeal, are getting additional money this year through the Basic Education Program, funding from the state departments of Transportation and Economic and Community Development, and state-shared taxes.
In emails over the weekend, Ragan said there were a number of reasons he supported the repeal.
“First, as Dr. (Alan) Greenspan noted, you get less of what you tax,” Ragan said. “The Hall tax is a tax on investments. Less investment means less economic growth and prosperity.
“Consequently, eliminating unnecessary taxes on investments just seems to be common sense if you want to increase economic growth and prosperity.”
Second, he said, the state had an estimated surplus in forecast revenue collections that is approaching $600 million so far this fiscal year over the original economic forecast. As he understands it, there is about another $130 million that could be called surplus at the beginning of the next fiscal year in something called “unrecognized” revenue for this fiscal year.
“Bear in mind that we have already appropriated money for the state’s rainy day fund and ‘repaid’ over half of the ‘borrowed’ amounts to the roads and infrastructure funds that were drawn down in the last recession,” Ragan said in a Sunday email. “Beyond these amounts, we budgeted sums for building repairs and maintenance that had been delayed for years, fully funded the Basic Education Program (BEP), and increased amounts going the local education authorities (LEAs) for teacher compensation, increased the Tenn Care allocation, and many other budget allocations.
“Consequently, to me, it is foolish, when there are revenue surpluses, not to decrease the tax burden on citizens.”
Third, Ragan said, when the Hall tax was enacted early in the last century, it only affected the very wealthy.
“Times have changed,” Ragan said. “It now adversely affects those ordinary Tennesseans who have invested for retirement. The Hall tax penalizes the very activity we want to encourage: planning and investing for future retirement.”
At Monday’s breakfast, Calfee, a Kingston Republican and co-sponsor of the House legislation, said his preference would have been for a bill that reduced the Hall tax over a seven-year period, with a hold on the reductions during bad revenue years.
Oak Ridge Today has also requested comment from Yager, who is also a Kingston Republican and a co-sponsor of the Senate legislation, but hasn’t received a response yet.
The Hall income tax reduction and repeal bill was approved 29-1 in the Senate and 66-17 in the House, according to information supplied by Ragan.
Oak Ridge will have to plan for disappearance of revenue
Gooch said the city will now have to plan for the prospect that the Hall income tax funding is going to disappear. He said the legislation essentially amounts to an unfunded mandate on the city by the Tennessee General Assembly.
“It’s serious,” he said. “We told everybody all along that it’s serious. It’s very difficult to deal with.”
In the meantime, with the governor’s approval of the legislation uncertain, the city continues to lobby against it, Gooch said.
Haslam has said he would have preferred a bill with just the one-time cut from 6 percent to 5 percent, leaving future cuts to future legislatures depending upon the state’s fiscal condition at the time.
Ragan said the General Assembly can change the income tax reduction or stop it with new legislation. But it passed by an overwhelming majority last week, and he does not expect the legislation to be repealed.
“Nonetheless, in the world of politics, anything is possible,” Ragan said.
Gooch said other approaches were possible. The legislature could have raised exemptions instead or “made cities whole.” The state has tremendous resources and can make up hundreds of millions of dollars, Gooch said, but cities and counties are far more restricted.
“They could make us whole,” Gooch said. “They made no attempt.”
Ragan said he thinks the city’s assessment of the potential negative impacts of the legislation is as accurate as possible.
“Regardless, for the immediate future, it becomes a fact we must deal with,” he said.
If the city has ideas for legislation that could offer solutions, Ragan said, he will be glad to consider them.
Some supporters, including House Majority Leader Gerald McCormick, a Chattanooga Republican, have said the phased tax reductions over six years give cities and counties time to prepare.
“It gives us time to prepare,” Gooch said in response. “It doesn’t let (us) know where to go to make up the reduction.”
But, he said, “We’ll deal with this the best we can.”
Asked where the support for the legislation came from, given the opposition from cities and counties, Gooch said it is his opinion that the support came from outside interest groups that have worked for a number of years to repeal the Hall tax.
Ragan said he would need to know more about which groups Gooch was referencing before he could respond.
“I do not know of any group outside of Tennessee that directly benefits from the repeal of the Hall tax,” Ragan said.
Impact on local communities
The amount collected by Oak Ridge from the Hall tax increased each year between 2010 and 2015 according to data supplied by McNally. It rose from $366,000 in 2010 to $708,000 in 2015.
Calculated on a six-year average, the 1 percent reduction in the coming fiscal year is about $81,000, McNally said. (That’s smaller than the $119,000 revenue loss calculated by Gooch.)
The impact would be much larger in Oak Ridge than in any of the other local communities.
Here are the expected impacts on other local communities:
- Anderson County, where the tax revenues increased from about $89,000 in 2010 to $172,000 in 2015—roughly a $21,000 revenue loss in the coming fiscal year based on a 1 percent reduction calculated on a six-year average.
- Clinton, where the tax revenues increased from about $56,000 in 2010 to $112,000 in 2015—roughly a $12,000 revenue loss in the coming fiscal year based on a 1 percent reduction calculated on a six-year average.
- Roane County, where the tax revenues decreased from about $125,000 in 2010 to $98,000 in 2015—roughly a $19,000 revenue loss in the coming fiscal year based on a 1 percent reduction calculated on a six-year average.
- Oliver Springs, where the tax revenues increased from about $6,500 in 2010 to $17,000 in 2015—roughly a $1,700 revenue loss in the coming fiscal year based on a 1 percent reduction calculated on a six-year average.
- Rocky Top, where the reduction is only expected to be $331.
Here is a spreadsheet of three years’ worth of Hall income tax collections and estimated losses for certain localities provided by McNally’s office:
|Location||2013||2014||2015||3-year Average||2017 Estimated Collections (In Absence of the Tax Rate Decrease)||Estimated Loss|
|ANDERSON COUNTY||$ 132,575||$ 151,199||$ 172,919||$ 152,231||$ 153,715||$ 25,619|
|ROANE COUNTY||$ 131,014||$ 93,019||$ 98,856||$ 107,630||$ 108,679||$ 18,113|
|CLINTON||$ 89,080||$ 67,384||$ 112,457||$ 89,640||$ 90,515||$ 15,086|
|OAK RIDGE||$ 476,902||$ 584,933||$ 708,454||$ 590,097||$ 595,851||$ 99,309|
Other cities, counties expected to eventually lose millions
On Thursday, Watson said the legislation, which the city opposed, could cost Knoxville between $12 million to $13 million. The Knoxville News Sentinel reported that Knoxville received $10 million in Hall tax revenue in fiscal year 2015, and Knox County collected $3.3 million. Other cities and counties are also expected to lose millions, including Chattanooga, Hamilton County, Nashville, Memphis, and Shelby and Williamson counties. Nashville received $14.6 million in Hall tax revenue in fiscal year 2015, and Memphis collected $14.8 million. Chattanooga received $4.17 million.
Watson said the Hall income tax is one of the last progressive taxes in Tennessee, and the state is moving more completely to regressive taxes such as sales taxes, he said. He called the bill a big move and said it came after the state budget had already been approved.
Watson said the Hall income tax has been a normal revenue stream. Relying more heavily on sales tax revenues is fine for those cities that have many stores, but it’s not great for those municipalities that don’t, he said. He thinks the tax repeal will create more of a burden for smaller and medium-sized cities.
Watson told Ragan in an April 21 email that the representative’s district has retail sales challenges, and the unintended consequences of the state action could be detrimental to medium-sized communities like Oak Ridge.
The News Sentinel and Chattanooga Times Free Press have both reported that officials in other cities, including Chattanooga and Germantown, have also expressed concern about the legislation and the holes it will leave in their budgets, saying that covering the loss of Hall taxes paid by an estimated 205,000 people across the state could force cities to hike property taxes on far more homeowners and businesses across Tennessee to maintain essential services like fire, police, schools, and streets.
The Hall income tax is imposed only on individuals and other entities receiving interest from bonds and notes and dividends from stock. It was enacted in 1929 and was originally called the Hall income tax for the senator who sponsored the legislation.
Taxpayers 65 and older are exempt from the Hall tax if their total income from all sources is $68,000 or less for joint filers and $37,000 or less for single filers. In addition, the first $1,250 in taxable dividend and interest earnings for all single filers and the first $2,500 for all joint filers is tax-exempt.
With the repeal of the Hall tax, McNally said Monday, the only remaining income tax in Tennessee will be the corporate franchise and excise tax. He said there is no move to repeal that tax.
Legislation had supporters
The Hall income tax legislation has advocates and supporters, including Americans for Prosperity-Tennessee and Tennesseans for Conservative Action. The Times Free Press reported that the automatic cuts were enshrined at the last minute by AFP-Tennessee and the Nashville-based Beacon Center.
“We’ll see our economy grow stronger as companies choose Tennessee for our favorable tax structure and pro-business environment,” AFP-Tennessee state director Andrew Ogles told the Times Free Press. “I firmly believe this bill will lead to real economic growth in our state.”
Senator Mark Green, a Clarksville Republican who was the bill’s Senate sponsor, told the News Sentinel that the tax cut was historic and “as good as it gets for Tennessee seniors and for businesses who want to invest in Tennessee workers.”
In a Friday press release, TCA said it applauded the Tennessee General Assembly for passing the legislation. Mark Braden, a founding member of the group said that TCA had heard from thousands of Tennesseans who supported ending the tax.
“Thanks to the thousands of conservatives across the state who signed our petition and pushed for a Hall tax repeal,” Braden said in the release. “This phase-out is exactly the kind of conservative leadership that helps Tennessee stand above other states when it comes to recruiting businesses and families that help our communities prosper.”
The TCA said the tax rate reduction from 6 percent to 5 percent in fiscal year 2016 is a 17 percent cut from the total dollars collected by the state for FY 2016.
In March, TCA ran radio and digital advertisements calling for the end of the tax.
Some critics, including the Institute on Taxation and Tax Policy in Washington, D.C., and Representative G.A. Hardaway, a Memphis Democrat, said the tax cut would mostly benefit the rich and those few families with large amounts of wealth.
One resident at the Monday Breakfast with the Legislators in Oak Ridge raised a question about whether the reduction and repeal primarily benefits those in upper income brackets, while one supporter said the tax mostly affects members of the middle class who have retirement income.
Anderson County Commissioner Jerry Creasey questioned why the legislature was working on the Hall tax before the food tax.
“We ought to be working on the food tax first and the Hall tax second,” he said to a round of applause.
McNally said the legislature will probably finish reducing and repealing the Hall tax before focusing on the food tax.
See a Halls income tax allocation spreadsheet here: HIT Allocations 2010-15. Provided by McNally’s office, the spreadsheet includes the amount paid to cities and counties each year between 2010 and 2015, the amount the governments could receive after the expected 1 percent reduction in the next fiscal year, and the amount of the reduction, based on a 1 percent reduction calculated on a six-year average.
Note: Oak Ridge Today has not heard from anyone who pays the Hall income tax in Oak Ridge or Anderson or Roane counties, and who would like to see the tax reduced or repealed. If you are of one of those people and would like to talk to us, feel free to contact John Huotari at (865) 951-9692 or [email protected]
Copyright 2016 Oak Ridge Today. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.