Tennessee Legislature Takes First Steps to Phase Out Inheritance Tax

The Tennessee Legislature took its first steps on March 21 to phase out the state's inheritance tax (SB3762/HB3760) as the House Finance Subcommittee unanimously approved an amendment that would repeal the inheritance tax by 2016.

The tax which brings in $100 million in annual revenue had been the target of repeal before the session started until Governor Bill Haslam expressed concern that the state does not have the resources to replace the revenue generated by the tax and that a full repeal could jeopardize the state budget if the economic recovery does not continue. Rather than pushing for a full repeal, the Governor in his State of the State address proposed a modest increase in the exemption level from $1 million to $1.25 million.

The Governor’s position appears to have change based on comments from Commissioner of Revenue Richard Roberts following the vote that the Legislature’s move was done with the support of the Haslam administration after reviewing the State budget and citing the recent increase in state revenue. “The thinking was that this is an important step toward (reducing) the tax burden in Tennessee on businesses and farmers,” Roberts stated following the vote.

The fiscal note on the Governor’s original proposal to increase in the exemption was estimated to be an annual $14 million recurring decrease in state revenue. Based on the amendment, the fiscal note will now increase to  an annual $100 million decrease in state revenue starting in 2016. It remains to be seen whether the fiscal impact will serve as an obstacle to efforts to repeal the tax.

Governor Haslam may have been emboldened by the recent repeal of the inheritance tax in Indiana, where the Governor signed a bill into law on March 20, phasing out the Indiana tax. In Tennessee, the Legislature appears poised to follow suit. However,  whether the bill passes will mainly be a product of whether Governor Haslam continues to believe that this is a prudent fiscal move.

The Bill will be considered by the full Finance Committee in the coming weeks.