The Impact of the Hall Tax Reduction/Elimination on Middle Tennessee Investors

By Art Haws, CEO HawsGoodwin Financial | Guest Column for the Nashville Business Journal

In 1929, the State of Tennessee signed into law what is known as the Hall Tax. This tax structure is the state’s only means of taxing personal income in Tennessee. Essentially, the Hall Tax is levied against out-of-state taxable interest and dividend income exceeding $1250 for an individual or $2500 for a married couple.

The current Hall Tax rate is 6%, but the proposed legislation which was presented to the Governor’s office in April, and was signed by Haslam on May 20, would reduce that rate to 5% for the 2016 tax year, and would continue reducing the rate by one percentage point until the tax is ultimately eliminated.

The Hall Tax was essentially created to financially bolster state and municipal governments in Tennessee. In 2015, the tax generated a total of $304 million with $198 million dispersed to the state and $106 million dispersed to Tennessee cities. The disbursement proportions were based on the number of individuals paying the tax within their respective municipalities.

Examples of taxable items under the Hall legislation include dividends from corporations; investment trusts or mutual funds; bank stocks or savings and loan associations outside Tennessee; bonds issued by states, counties, and municipalities outside of Tennessee; and bonds issued by foreign governments.

Given the breadth of what the state considers taxable as evidenced by the examples above, what does the elimination of the Hall Tax ultimately mean for Tennessee investors? On the one hand, it’s most certainly a tax break. On the other hand, there may be some negative impact as it relates to the Tennessee Municipal Bond market.

A decrease and projected elimination of the Hall Tax will make out-of-state municipal bonds more attractive to TN residents than they have been in the past.  When/if the tax is eliminated, bond buyers will no longer be penalized for buying out of state bonds, which will allow for a broader selection and diversification of investment products. 

At the same time, Tennessee bonds will most likely see a decrease in-state demand and slightly higher yields to attract both in-state and out of state buyers.  SVP and Senior Market Strategist Mike Davern of Nuveen Investments, the manager of the largest Tennessee municipal bond fund feels any effect will be minimal.

“This is not a situation where demand will suddenly flip one way or the other,” said Davern. “What is of greater significance is how the state — and the cities which use Hall tax funds — run their finances over time.” 

In the grand scheme of things, the Hall Tax has been a headache for investors and their advisors. The numerous intricacies associated with what constitutes taxable dividends and interest under the tax, along with the additional taxes due won’t be missed by many once the tax is completely eliminated. With the legislation in place to phase it out, this will create new opportunities for Tennessee investors to further diversify their portfolios and save a little money at tax time.

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