Two No-Income-Tax States, New Hampshire & Tennessee, Take Opposing Paths In 2020

Of the 50 states, nine do not impose an income tax. Of those nine no-income-tax states, two of them, Tennessee & New Hampshire, have an asterisk next to their name. 

That’s because while New Hampshire & Tennessee do not tax wage income, they do tax investment income. But that’s soon going to change for Tennessee, whose asterisk will be removed in January 2021, when the final percentage point of that state’s investment income tax, referred to as the Hall Tax, will expire. 

Tennessee’s Hall Tax was a 6% tax on dividends and interest income until state legislators passed a bill in 2016 that began a six year phaseout of the Volunteer State’s only income tax, taking it down one percentage point per year. That phaseout comes to a completion at the end of this year. 

There was concern briefly last week that Tennessee’s asterisk might not come off next year. In the waning days of the legislative session that concluded last week, some members of the Tennessee House sought to delay the Hall Tax’s elimination, so as to free up revenue for a $100 million sales tax holiday. 

Fortunately for those wanting to see Tennessee become a true no-income-tax state in six months, the Tennessee Senate won out at the end of the day and the new budget that passed two weeks ago recognizes the final one percentage point of the Hall Tax repeal, meaning that it will be eliminated entirely starting January 1, 2021. 

“Tennessee has long claimed that it didn’t have a state income tax, but that never was really true,” said Justin Owen, President & CEO of the Beacon Center of Tennessee, a Nashville-based think tank. “Starting January 1 of next year, we can say that Tennessee is truly income tax-free for the first time in nearly 100 years.”

While one of the two no-income-tax states with an asterisk will lose that dubious distinction at the end of 2020, New Hampshire’s asterisk will not only remain, but Granite State residents will also be hit with two tax hikes. 

New Hampshire Now The Only No-Income-Tax State With An Asterisk

New Hampshire levies both a Business Profits Tax (BPT) and the Business Enterprise Tax (BET), which is a tax on payroll. Both of these taxes have been cut in recent years. The BPT was cut from 8.5% to 7.9% in 2018 and the BET was reduced from 0.75% to 0.675%. 

After Democrats won control of the New Hampshire House and Senate in 2018, they made further reductions to the BPT & BET contingent on revenues coming in above projections by a set amount. The deal enacted in 2019 first cut the BPT from 7.9% to 7.7%, and the BET came down from 0.675 to 0.6%. 

Those 2019 rate cuts where part of a legislative package that also set triggers for a subsequent change to BPT and BET rates in 2021. Another round of BPT and BET cuts in 2021 was made contingent upon state revenue collections coming in 6% above the forecast for the current fiscal year, which ends June 30. That is not going to happen on account of the recession and associated drop in tax collections. 

A problem now facing New Hampshire businesses is the second trigger included in that 2019 deal, one that raises the BPT and BET rates 2.6% and 12.5% respectively — from 7.7% to 7.9% and 0.6% to 0.675% — if revenue collections come in 6% below projections or worse. This triggered tax hike, which looks to be a near certainty given what the recession has done to tax collections, will undo the BET and BPT relief enacted last year. 

Governor Chris Sununu (R) and Republicans in the New Hampshire legislature have pleaded with their Democratic counterparts in Concord to save New Hampshire employers from a mid-recession tax hike. 

“I wholeheartedly agree that this is not a time to raise taxes by 12.5% on our small businesses,” wrote Governor Sununu in a letter to Jim Roche, president of the New Hampshire Business and Industry Association. In that letter, Governor Sununu added that “[t]o punish our employers with a tax increase at a time when many of them are hurting would be terrible public policy and harm our economic recovery. As such, when the legislature returns to Concord, I will call on them to repeal the business tax ‘triggers’ that were included in the state budget passed last year.”

130 of the 161 New Hampshire House Republicans sent New Hampshire House Speaker Steven Shurtleff (D) a May 29 letter requesting that he allow full House consideration of their bill to keep current BPT and BET tax rates in place for two more years. 

“Between 30,000 and 40,000 businesses pay the Business Enterprise Tax, which comes even if they are not profitable,” the Republican letter stated. “If we do nothing, and the trigger is activated, the BET rate will rise by 12.5% on January 1. As a tax on businesses’ payrolls, and if our goal is to get people back to work, it is critical that we alleviate this future burden.” 

This Republican proposal was shot down by Democrats. On June 11, the Democrat-controlled New Hampshire House rejected, by a 154 to 174 vote, the bill to prevent these tax hikes from hitting on New Years Day 2021. 

New Hampshire House Speaker Steve Shurtleff (D) claims he hasn’t ruled out putting off the scheduled tax hikes, asserting that the decision can be made at a later date, even early next year. 

“I’m still giving it some thought, but I am concerned that it should have the proper vetting by the House Ways and Means Committee, as a bill of this magnitude deserves to have, and we’d still be able to take it up early in the next session,” Shurtleff told ABC affiliate WMUR News 9. 

New Hampshire voters who don’t want these tax hikes to take effect next year can hope Speaker Shurtleff and his Democratic colleagues have a change of heart. However the best bet for thwarting these mid-recession tax increases, many voters will determine, is to put Republicans back in control of the statehouse this November.