[Note: An earlier version of this story contained inaccuracies that have been corrected below. We regret the error and inconvenience.]

The Mississippi Legislature is pondering eliminating the state’s personal income tax to help supercharge Mississippi’s economy.  The theory is that such a move would entice businesses to move to Mississippi or to stay here.

Some Mississippi policymakers believe that if Mississippi wants to enjoy population growth (a good indicator of a healthy economy since residents tend to vote with their feet for better jobs and living conditions), changes have to be made to the state’s tax code.

In the latest U.S. Census, the state lost more than 6,000 residents, the first population loss for the state after 60 years of largely stagnant growth compared to neighboring states.

Among the states Mississippi competes with, Florida, Tennessee and Texas all enjoyed large-scale population growth in the last decade.  One thing the trio share besides dynamic, high-growth economies is the lack of a personal income tax.

The Legislature’s Joint Tax Study Committee wrapped up two days of hearings on August 26 as state and national experts testified about the possible benefits and challenges of scrapping the income tax.

While most of those experts agreed that there is benefit in eliminating the income tax, the bulk of the conversation surrounded the question of how to replace that revenue in order to fund state government.

Revenue from the personal income tax was $1.9 billion in fiscal year 2019, the last “normal” year before the influx of “stimulus” and other COVID funds.  That $1.9 billion accounted for almost one-third (32 percent) of the state’s $5.6 billion General Fund budget.  Corporate income and franchise taxes added another 8.5 percent ($488 million), but eliminating those taxes is not under consideration so far. Sales tax (and the related “use tax”) accounted for 44 percent ($2.5 billion) of the General Fund budget.

The initial tax reform proposal that House Speaker Philip Gunn drafted, which passed the House earlier this year but died in the Senate, would have phased out the state’s income tax and paid for it by increasing the sales tax for most items from 7 percent to 9.5 percent.  The sales tax on groceries, however, would be cut in half, from 7 percent to 3.5 percent.

Several business associations spoke against the portion of the Speaker’s proposal that would have raised the sales tax 2.5 percentage points (the same increase as the proposed general sales tax increase) on several types of business inputs, such as manufacturing machinery and farm implements, among others.  This would place the affected businesses at a competitive disadvantage to similar businesses in other states.

These items already have a lower sales tax rate than the 7 percent retail rate, but many economists believe business inputs should not be taxed at all, because that tax is simply added to the price of goods, without the consumer realizing the actual amount of tax they are paying on a product.  It is better to place the sales tax on final purchases.

Many retirees have complained that the Speaker’s plan would raise their taxes, since they already pay no income tax on their retirement income and the sales tax increase would hit them hard.  The Speaker argues that the cut in grocery taxes will offset much of the other sales tax increases for them, since, he says, retirees spend a higher percentage of their income on food.  One person who testified at the hearing, using analysis from a liberal Washington think tank, said income taxes should be increased to pay for services needed by the poor, and a sales tax increase would hurt the poor more than anyone else.

While Gov. Tate Reeves, Speaker Gunn and Lieutenant Governor Delbert Hosemann seem to agree on the principle that the income tax should be phased out, details will be key.  The governor has expressed a desire to phase it out without raising other taxes.  This would be accomplished by lowering the rate each year based on the revenue growth in the previous year, which will take anywhere from 18-to-40 years, based on economic growth patterns.  This stands at odds with the Speaker’s plan.  Hosemann has not been specific about his ideas.

All this sets up an interesting political battle in the months ahead if the leaders can’t come to some agreement ahead of the 2022 Legislative Session.

 

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