Hall Tax phase-out impacts Town budget

The pending reduction and eventual end to the tax on stocks and dividends in Tennessee will cause a source of state funding for Farragut to drop.

Tennessee’s legislature ap-proved a bill that would end the tax on income from dividends and stocks, called the Hall Income Tax, in 2022. This year, it also would reduce the tax from 6 percent to 5 percent.

Gov. Bill Haslam has yet to sign the bill. Farragut receives funding from the Hall Tax based on number of residents who pay into it.

“The town of Farragut has always worked with limited resources since the Town’s founding in 1980, and any reduction in one of our revenue sources will certainly have an impact on our ability to provide the level of service our citizens have come to expect,” David Smoak, Town administrator, said, responding to the pending legislation.

“These revenues go into our general fund and are used to provide essential services to our citizens,” he said. 5.8 percent of Farragut’s revenues for the current Fiscal Year 2016 budget come from this tax.

State Sen. Richard Briggs and State Rep. Jason Zachary voted for the reduction bill. Both said the current tax burdens retirees with 401K and savings plans. Both said Farragut residents had written to them supporting the tax’s elimination.

“People want to decide how to spend their money rather than have the government decide,” Briggs said. He said the gradual phase-out would give towns time to adjust and revenue from Sales Tax might increase.

“It’s not just a tax for the wealthy. It affects families who both parents work throughout their working lives, and they’re now in retirement, and whenever there’s capital gains, the state was classifying those as dividends, which was requiring a 6 percent tax on those gains,” Zachary said.

Farragut Mayor Ralph McGill also said the Hall Tax was not fair.

“If you’re going to have an Income Tax, it ought to be effective for most people, and this is a case where you take a few rich people and you soak them, but let everybody else go,” McGill said. However, he said the bill would cause problems for towns such as Farragut.

“The notion of getting rid of that kind of taxation is a good notion, I think, but the problem is that now we upset the balance of payments to cities and towns like us, and we have to cover that difference, and so now the burden is on us, and that doesn’t seem quite fair either,” he said.

Smoak said the Town has averaged $536,000 per year in revenues over the past five years from the Hall Income Tax. He said a reduction of 17 percent, which is what the estimates are from the legislature, would reduce those averages by $91,260 per year.

He spoke about this year’s 1 percent reduction in Hall Income Tax during the Board of Mayor and Aldermen meeting on April 14. At that time, the State Senate had approved an earlier version of that budget that had the same reduction for this year.

“It doesn’t affect the monies that we would get in this year’s budget that we’re planning for next year, but the following year that’ll reduce it by at least 17 percent of what we would get this year,” Smoak said at the meeting. Fiscal Year 2017, which will not be affected by the current bill, begins July 1, while Fiscal Year 2018, which will be affected, begins July 1, 2017.

Smoak said the Town has not yet made plans for adjusting to the decrease in the current bill.

“Obviously that fluctuates every year based on investment income,” he said regarding the whole amount. “It’s really hard to tell, but we know it would be that much less.”

Farragut does not have a municipal Property Tax, nor does it receive any portion of the Property Tax its citizens pay to Knox County. The Town relies on Sales Tax and other revenues to fund its budget, including the Hall Tax funding.

“It’s too soon to tell what long-term impacts this will have on the Town’s budget, but it’s logical to think that generating additional Sales Tax revenues will become even more important in the future,” Smoak said, responding to the current, pending bill.

Smoak said the Town had completed a recent a special census this year, which would help it deal with the potential loss of revenue from the Hall Tax. The census showed the Town’s population increasing from 20,676, as shown in the 2010 U.S. Census, to 22,674, an increase of 2,074 citizens. More people will mean more revenue. State shared revenue from Sales Tax is distributed to Farragut based on the number of people rather than amount of money raised from the community.

Unlike the funding from the Hall Income Tax, state shared revenue from Sales Tax does not all go to the general fund. Some of it goes toward state roads in the community.