The Income Tax Bait and Switch -- Tennessee

Tennessee is one of those states that prides itself on not having an income tax.  And I will say that in general, Tennessee has been a very good place for us to do business.

However, for entrepreneurs whose income is mostly derived from a self-owned company, the whole "no income tax" thing in Tennessee is misleading.   In fact, I just had to prepare and pay 10 different quasi income tax submissions in TN -- the state Excise tax on businesses, the state Franchise tax on businesses, and county business tax in 8 counties.  Some of these are not actually income taxes but are taxes as a percentage of revenue, but in some sense these are even worse than income taxes as they must be paid even if the company is losing money.  Only California with its $800 minimum tax just for existing do we see a worse setup for a startup or money-losing entity.

In most states I pay state income tax based on my company's earning in that state (as an S-corp the corporate earnings pass through to my personal income taxes).  But in TN, despite the fact it is not our largest state and supposedly has no income tax, I am going to end up with one of our highest state tax bills.

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  • ErikTheRed

    If you think that's bad, check out what they've done to transportation companies that have been tied to the state because FedEx put a major hub in Memphis (and probably why FedEx has shifted quite a bit of traffic to nearby Cleveland). Brutal.

  • Daniel Barger

    The reason for this isn't rocket science. Somebody has to pay the bills. If that somebody isn't Joe Citizen via a personal income tax that someone will be Joe Businessman via taxes on businesses. The 'how' may vary but no matter what the state
    gets it's pound of flesh. Either way Joe Citizen pays the price....either directly via direct taxation or indirectly via increased costs of goods and services to cover the taxes paid on his behalf by business. Nevada, another 'no income tax' state has for decades historically survived by taxing the shit out of casino revenue. In the past couple of decades with the spread of legal gambling resulting in fewer visitors to Vegas/Reno etc the revenue stream has suffered. As such the state is looking about to find new and creative ways to suck the lifeblood from it's residents.

  • random_eddie

    A corporate income tax is not an income tax, it's a consumption tax. It's effectively a value-added tax, which is in turn effectively a retail sales tax with an unusual collection mechanism.

    A corporate revenue tax is a like a consumption tax with some very perverse incentives; consumption goods which pass through more corporate entities in the course of their production are taxed more heavily.

    I think consumption taxes are preferable to income taxes; consumption taxes incentivize savings and capital formation, while income taxes penalize wealth-producing activity. The corporate income tax is good (although a direct retail sales tax instead would probably be better), but the corporate revenue tax is awful because of its distortions.

  • slocum

    Yes, and no. State revenues do have to come from somewhere. But there are big variations in how much states spend and how efficient they are. For example:

    "Spending varied wildly from state to state according to the Annual Highway Report. South Carolina and West Virginia spent just $39,000 per mile of road in 2012 while New Jersey spent over $2 million per state-controlled mile. Rhode Island, Massachusetts, California and Florida were the next biggest spenders, outlaying more than $500,000 per state-controlled mile. "

    http://reason.org/news/show/21st-annual-highway-report

    Or here:

    http://www.taxpolicycenter.org/statistics/state-and-local-general-expenditures-capita

    New York spends over $12,000 per resident, while Tennessee, Georgia, and Florida are all under $7,000.

  • TruthisaPeskyThing

    States without income tax to spend less money than states with income tax. The difference is substantial. Therefore, there are less bills to pay in states without income tax.

  • kidmugsy

    "A corporate income tax is not an income tax, it's a consumption tax." It is if its incidence is on customers. It isn't if its incidence is on employees or shareholders. Whether any useful generalisation can be made about its incidence I don't know.

  • DirtyJobsGuy

    TN has a tradition common to the new south of state government intervention (investment?) in economic activities. They also spend lavishly on the education for good or bad. Thus the per capita spending is high enough to need the corporation taxes. By comparison NH has no sales or income taxes a modest corporate income tax and mostly local control of spending. The structure of the NH legislature is the key with a large number of members serving only a few weeks every other year if I remember right. Old timers can run for the assembly by appealing to a smaller district and the time required is modest. More states should take this path.

  • irandom419

    Agreed, the key is not letting them meet that long. We let them meet every year here in Orydumb and bingo, massive minimum wage increase. I guess the lunacy in legislation is a sign of too much free time.