Sustainable Mississippi Income Tax Reduction

With increased tax revenues from increased consumer spending, sustained economic growth, and the primary and secondary effects of federal COVID-19 assistance programs, many states are cash-strapped and a significant number used at least part of their surplus to provide tax relief. Many Mississippi lawmakers would like to join them.

As part of Republican Gov. Tate Reeves’ budget proposal, Mississippi policymakers will once again consider a plan to eliminate the state’s personal income tax. According to the governor’s proposal, the 4% bracket, imposed on the $ 5,000 to $ 10,000 range of taxable income, would be eliminated in 2023, along with part of the 5% bracket, which starts at 10,000. $. Under the Taxpayer Pay Raise Act, passed in 2015, the lowest bracket (3%), on taxable income below $ 5,000, should already be removed next year.

To compensate for the variation in income, the governor’s plan relies almost entirely on the state’s $ 1 billion budget surplus as of fiscal 2021. Second, to ensure that the reduction can be sustainable, fiscal growth future would be capped at 1.5% per fiscal year.

There are many reasons to believe that an income tax cut in Mississippi would produce positive economic benefits, and policy makers’ instincts are correct there. Reducing income tax is good for economic growth because tax rates influence the number of people working. All other things being equal, it also makes a difference in where people choose to live. However, fiscal sustainability will be key to realizing the full potential of any tax reduction. This could prove difficult given that personal income tax accounted for $ 1.9 billion in revenue, or 33% of total state general fund revenue, in fiscal 2019.

Unlike previous income tax repeal plans, the current plan would eliminate personal income tax without adjusting other tax rates or bases. Bill 1439 (which passed the Mississippi House of Representatives this year) proposed a 2.5 percentage point increase in state sales tax to offset lost revenue associated with a reduction substantial income tax rate, with the goal of ultimate repeal. Here, Governor Reeves makes it clear that no direct revenue compensation is contemplated, although he likely hopes for increased revenue from other taxes and population growth, to help offset some of the loss of income. While tax cuts are certainly helpful for economic growth, and states without personal income tax are particularly attractive for offshoring, Mississippi lawmakers certainly shouldn’t expect sales taxes. or other higher incomes replace the lost incomes by the repeal of the income tax.

When people make decisions, they usually do so on the sidelines. In the workplace, they envision the compromise of working an extra hour, an extra day, or a week longer. Individual preferences, including the value of time, will vary, but on average, if the benefits of working an extra quarter outweigh the cost of giving up that time to do something else (e.g., hobbies), people will choose to work. Marginal tax rates exist in this paradigm. This is particularly important for small businesses, most of which are flow-through entities and subject to personal income tax. National migration, both for individuals and businesses, can also be driven by tax systems.

With a maximum marginal rate of 5%, Mississippi is in the middle of the pack: once all of the income tax cuts passed in 2021 are in effect, 5% will be the highest median marginal rate in the country. However, Mississippi taxpayers only need to earn $ 10,000 in taxable income before reaching the top bracket.

All other things being equal, people will choose to reside where they can generate the greatest return on their work. This should mean that the state with the lowest tax rate will attract the greatest number of residents. In practice, other factors also have an impact on national migration. Tax policy can be overshadowed by a business’s infrastructure or technology access needs. Others may prioritize access to human capital or local property tax rates. Even though taxation was the most important weight on the residency decision scale, a basket of other preferences can still tip the balance in a state’s favor. These observations do not negate the economic importance of sound fiscal policy, but they caution against relying too much on reform for economic growth to the exclusion of all others.

In both tax reform and program creation, policymakers should be careful about inadvertently shaping unfunded liabilities. Currently, the United States is facing an inflation rate unprecedented since 1990. The government is not immune to these effects. Like any other consumer, income growth must match the rate of inflation for purchasing power to remain constant. The wrong timing or the wrong combination of income cuts and spending restrictions could make service delivery particularly difficult. Even if price inflation returns to the Federal Reserve’s 2% target rate, a 1.5% increase in Mississippi’s annual budget would still result in a 0.5% budget cut in real terms. Some states have high spending levels that may well be reduced, while there may be much less room for reduction in Mississippi.

Ultimately, it is up to Mississippi policymakers and their constituents to decide how many and what kind of government services the state should provide. Lawmakers are correct in viewing income tax as an appropriate means of tax relief given the robust growth in government revenues, and in viewing income tax reduction or elimination as an option. a favorable choice for growth, especially in this increasingly mobile era. Gradual tariff reductions subject to revenue availability may be a good approach, and policymakers need to decide how much revenue growth to spend on this project, and how much, if any, will limit government growth in doing so.

As lawmakers debate the benefits of repealing income tax, they need to be clear about the trade-offs. One way to reduce the reliance on income tax is to shift some of the tax burden to a less economically damaging tax, as lawmakers previously envisioned. (We have assessed the earlier proposals here.) If, in turn, lawmakers agree with the governor’s approach of phasing in rate cuts without replacement income, they must be clear about the pace and sources of the change. this tax break. Given the current revenue path, it is possible to reduce taxes without offsetting increases elsewhere, but “going back to zero” would require strict fiscal discipline and tough choices in the state budget.

Reducing income tax can be an effective treatment for economic ills, but it tends to fail as a cure-all. Income tax relief is, after all, an instrumental goal, not an ultimate goal: the ultimate goal is economic growth and prosperity, so how a tax is paid – what income offsets or reductions expense – remains an important consideration. Mississippi lawmakers are expected to give tax breaks in 2022, but they don’t need to take an all-or-nothing approach. There are many ways to improve the state’s tax code, even if the complete repeal of income tax is not on the table.

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