The effort of House Speaker Philip Gunn and other Republican leaders in that chamber to overhaul the state’s tax structure is most likely doomed.
A massive and controversial undertaking like that — rushed through the House in about a 24-hour period last week — is going to hit a wall in the Senate as business groups and others pore over the 317-page bill and see whose ox it gores.
The summary itself runs three pages and includes not just the three big items — phasing out the individual income tax, raising the general sales tax, cutting the sales tax on groceries — but also about 20 increases in the sales tax for segments of the economy that currently pay less than the 7% rate. Some of those who could be impacted are farmers, manufacturers, automobile dealers and utilities and their customers. All of these have lobbyists who will be working hard to be sure their industry’s preferential tax treatment is not changed.
That obvious obstacle aside, the whole idea of shifting the state’s tax burden from income-based to consumption-based raises lots of questions.
First is whether the package is really revenue-neutral, as Gunn and other House backers claim. When they rolled out the plan, they didn’t produce a financial analysis of the effect on the state’s treasury, so you have to wonder if one has been done.
The closest thing I’ve seen is a study released this month by the state’s top economists on the impact of eliminating the individual income tax, as Gov. Tate Reeves has also proposed. The study calculated that the state’s general sales tax, which now stands at 7%, would have to be raised to 10.75% to offset the loss of income tax revenue, assuming none of the current sales tax exemptions were altered.
The House plan proposes immediately raising the general sales tax to 9.5% while slicing it on groceries to 3.5% over five years. Clearly that’s not enough to offset the cost of eliminating the income tax, and that’s why all those other exemptions are to be scaled back or eliminated. Apparently the public is supposed to take on faith that those other changes will make up the difference. If they don’t, that means less money for schools, public safety, public health and all the other services that citizens depend on.
There is also the question of fairness. Mississippi has a low income tax compared to most states. Two studies cited by the state economists’ report says Mississippi’s income-tax burden ranks in the nation’s lower fourth. Meanwhile, it already has the nation’s second-highest state sales tax.
The income tax is progressive, the sales tax is regressive. That is, a tax based on income hits hardest those who can most afford it; a tax based on sales hits hardest those who can least afford it.
The House plan would make the cost of groceries less expensive, which is particularly helpful to those at the lower end of the income ladder. It would, however, make clothes, electricity, automobiles and most everything else more expensive for them. Whether they would come out better or worse, again it’s hard to tell without more solid numbers.
Gunn tried to respond to criticism about his support for raising the sales tax by suggesting the burden is discretionary. “If they don’t want to pay the sales tax on an item, they don’t have to buy the item,” he said.
By that same logic, he could say that those who don’t want to pay income tax should just not work.
Lastly, if Mississippi is going to drastically change how it gets its money to operate, it needs to take into account the pros and cons of the individual income tax and the sales tax purely as funding mechanisms.
Presently, the state’s general fund derives almost 70% of its revenue from those two tax sources, with the share close to equally divided between them.
As the state economists point out in their report, the advantage for government in depending on the sales tax is that it doesn’t have dramatic swings. In good times or bad, the amount of money the sales tax generates is about the same. By comparison, the income tax is on more of a roller-coaster, following the economy’s boom and bust cycles.
Thus, if the state were looking simply for revenue stability, a consumption-based model is advantageous.
But if the state is looking for the best way to cover rising costs and new initiatives, that’s the income tax. From 1980 to 2020, according to the economists’ report, individual income tax revenues in Mississippi rose an average of 5.9% annually. That’s almost four times higher than the average annual growth rate of sales tax revenues during the same 40-year period.
Republicans say repeatedly that they want state government to operate more like a business. What business would trade its high-growth revenue stream for its low-growth one?
Although the House plan is questionable, at least it’s better than Reeves’ idea to eliminate the income tax without increases elsewhere. That would be a disaster, reducing employment, stagnating the economy and driving more people away than it would attract.
nContact Tim Kalich at 581-7243 or tkalich@gwcommonwealth.com.
