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On January 1st, 2021, Tennessee became the second state, after Alaska, in the nation to eliminate its state income tax after the tax was eliminated through a gradual six-year process beginning in 2016 and ending in 2021. Prior to its repeal, Tennessee’s state income tax was known as the “Hall Tax.” Originally instituted in 1929, the Hall Tax applied a 6% tax on state residents’ interest and dividend income. Why would Tennessee repeal this policy? In addition to making residents 6% happier, the repeal of the tax also had positive effects on the state’s economy.
In 2021, the first year that Tennessee had zero state income tax, the gross domestic product (GDP) growth rate was 8.8%, which is the highest rate recorded in the 2000s. It was also the highest growth rate across all 50 states. This demonstrates how the absence of state income tax encouraged economic growth due to the fact that one of the main components of GDP is consumption, or consumer spending. With the removal of the Hall Tax, Tennessee residents likely experienced an increase in disposable income. When this disposable income is spent in the Tennessee economy, it boosts GDP and supports economic expansion. This hypothesis is supported by the state’s consumption data growth rates: in 2021, personal consumption expenditures increased in Tennessee by 14.1%, which is also the highest rate recorded in the 2000s.
The elimination of the Hall Tax has also made Tennessee an increasingly popular location for new residents, small businesses, and large corporations. Individuals and businesses are drawn to the financial benefits of not having to pay state income tax, giving them a competitive edge over competitors in states where such a tax is still imposed. This is evident in the state’s high share of inbound job moves: 54.4%, which is the third-highest net job migration of laborers in the nation, demonstrating the positive impact that the removal of the Hall Tax has had on making the state a desirable location for residence and business.
While the lack of state income tax has sparked economic growth, the state’s high sales tax does still result in a significant tax burden for state residents. According to think tank ThinkTennesse, in 2024, Tennessee had the second highest combined rates of state sales tax and local sales tax, totaling 9.55%. In 2021, the first year without the Hall Tax, 58% of Tennessee’s revenues came from sales tax, which is much higher than the national average of 33%. Also, Tennessee has a 4% tax on groceries, one of only 13 states with a grocery tax. These statistics indicate that, while the elimination of state income tax likely increased disposable income, this increase might have been less effective than one would assume at increasing consumption and boosting GDP due to the high sales taxes that continue to be incurred by customers when purchasing goods.
Overall, it appears as though the repeal of the Hall Tax was a pro-growth move that enhanced Tennessee’s business and living environment by allowing residents and local companies to retain more of their total earnings. As more states repeal similar taxes, the evidence supporting the change’s positive economic impact continues to grow. The repeal of the Hall Tax in Tennessee serves as a compelling example of how state-level tax reform can boost growth and attract new business, encouraging other states to do the same in the future. In the long run, this new policy allows states like Tennessee to compete with states that have more developed economies by attracting businesses and new residents.
