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About the 1-3-5 Graduated Plan of 1999
The 1-3-5 Graduated Tax Plan is the plan
that passed the Senate Finance Committee in November of 1999. The November Special Session ended two days later without a floor vote on the bill. This is a
compromise plan brokered by Sen. Bob Rochelle of Lebanon that includes:
- The elimination of the state tax on food. The local taxes of 2.25 to 2.75 will still to apply.
- The creation of a graduated income tax with generous personal
deductions.
- This income tax, as in the Governor's proposal, will
replace the current Hall Tax that applies to investment income only.
- The taxation of capital gains at full value, versus 50% under the Governor's proposal.
- Much of the same reforms in business and related taxes as the Governor's proposal.
The 1-3-5 proposal is actually an amended version of the Governor’s plan.
Although the 1-3-5 proposal does not include any
sales tax reduction, it does eliminate the state tax on food and it has
far higher personal deductions than the GovernorÁs proposal. By having
deductions at a very high level, the vast majority of Tennesseans will
see real tax relief. |
For a single person with no dependents:
- Pay 0% on the first $15,000 of income.
- Pay 1% on the next $15,000 of income.
- Pay 3% on the next $15,000 of income.
- Pay 5% on all income over $45,000.
Single adult with children / dependents:
Calculated the same as above, except the base deduction
begins at $22,000.
As well, additional deductions of $2,500 per dependent
are applied (note at right). |
Married couples with or without children / dependents:
Calculated the same as single adults, except that all
the numbers are doubled.
- Pay 0% on the first $30,000 of income.
- Pay 1% on the next $30,000 of income.
- Pay 3% on the next $30,000 of income.
- Pay 5% on all income over $90,000.
Additional Exemptions:
- $2,500 - Additional deductions per dependent.
- $2,500 - Additional deduction for seniors.
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For more, see Examples using the 1-3-5 Plan of 1999, and Most
Pay Less Under Graduated (1-3-5) Proposal.
Impact of the 1-3-5 Proposal on Different Income Groups
Nearly 80% either save or pay the same under the 1-3-5
Proposal
| Income Group |
Bottom
20%
|
Second
20%
|
Middle
20%
|
Fourth
20%
|
Top 20%
|
| Next 15% |
Next 4% |
Top 1% |
| Average Income |
$8,100 |
$17,500 |
$28,600 |
$45,300 |
$76,300 |
$158,000 |
$737,000 |
| Income Tax |
0.0% |
0.0% |
+0.2% |
+0.4% |
+1.0% |
+2.3 |
+3.5% |
| Food Tax Savings |
-0.8% |
-0.6% |
-0.5% |
-0.4% |
-0.3% |
-0.2% |
-0.0% |
| Tax Reform Effect |
-0.8% |
-0.6% |
-0.4% |
0.0% |
+0.7% |
+2.1% |
+3.4% |
| Federal Offset |
0.0% |
0.0% |
0.0% |
0.0% |
-0.1% |
-0.5% |
-1.3% |
| Net Tax Effect |
-0.8% |
-0.6% |
-0.4% |
0.0% |
+0.5% |
+1.6% |
+2.1% |
Notes: Addition discrepancies due to rounding. The state income tax
calculations above account for the Hall Tax savings as it is replaced with
the income tax. The state income tax can be used as an offset to federal
taxes and reduce the federal tax liability as noted above. Calculations
provided by the Institute
on Taxation and Economic Policy (ITEP).
Click here to download report from the Institute on Taxation and Economic Policy analyzing
both the GovernorÁs proposal and the 1-3-5 proposal (in PDF Format).
Tax reform is about creating a more equitable and fiscally sound tax system that meets the state’s financial needs.
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