Does Tennessee Have a State Income Tax?

Question: Does Tennessee Have a State Income Tax?

Answer: As of 2016, Tennessee is one of seven states in the United States that do not or nearly do not have income taxes. 

States With Nearly No Income Tax

There are seven states with no income tax in the U.S. As of 2016, those states are Alaska, Florida, Nevada, South Dakota, Texas, and Washington. As for states with almost no income tax, those are Tennessee and New Hampshire.

Tennessee does currently levy a tax on interest and dividends known as a Hall Tax, which is a flat 5% denoted by the state Constitution. This tax was added to the constitution in 1929 and is named for the representative that sponsored the policy. Until 2016, this Hall Tax was a flat 6%. It mostly affected seniors and others living off of stocks and bonds, i.e., retirement accounts and capital gains, rather than wages and salaries. In 2016, the state legislature voted to repeal this Hall Tax, effective January 1, 2022, barring any additional legislative changes. The plan is to decrease the Hall Tax by a percentage point each year. 

Tennessee had a Gift Tax that was repealed in 2012.

Because the state does not tax wages and salaries, it is commonly said that Tennessee has no state taxes, even if that is not currently exactly correct.

Pros Of Living In An Income-Tax-Free State

The obvious positive of having no income tax on personal wages and salaries is that most Tennessee residents can pay less in taxes each year.

Tennessee residents only have to pay Federal Income Taxes each April, for the most part. This can make the state more attractive for business growth and maintaining a well-educated labor pool 

Cons Of Living In An Income-Tax-Free State

To make up for this lack of personal income tax, Tennessee does have a relatively high sales tax rate of 7% on general merchandise and 5.5% on food.

In addition, individual counties levy their own sales tax above and beyond the state sales tax. 

In Shelby County, sales tax is 9.25% on general merchandise and 7.75% on food, total, which is the highest rate in the United States. This can cause basic expenditures to be less affordable overall, meaning that those who make less in personal income wages pay a disproportionate amount of taxes overall. Some media outlets claim that Tennessee has the most regressive tax policy because it benefits the wealthiest residents. 

More Information

From time to time, state legislators may attempt to enact an individual state income tax, but conservative groups often protest and the measures fail.

Every year, Tennessee has a "Tax Free Weekend" where certain items - in particular, school supplies and clothing - can be purchases without the 9.25% sales tax. Learn more about Tennessee taxes through the Tennessee Department of Revenue.