Introduction
Last Thursday, Mississippi House Speaker Philip Gunn (R) proposed a new “taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. swap” designed to target additional revenue toward the state’s infrastructure repair needs. This announcement follows an executive order issued by Governor Phil Bryant (R) last week declaring a state of emergency and ordering the immediate closure of more than 100 locally owned bridges deemed unsafe by federal officials.
Tax Swap Proposal
Speaker Gunn said his tax swap proposal, which he plans to submit to Governor Bryant and Lieutenant Governor Tate Reeves (R), would eliminate an income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. while increasing the tax rate on fuel. This proposal aims to redirect funding that would otherwise be collected as general revenue so additional funds can be allocated toward the state’s infrastructure repair needs.
Specifically, the Speaker’s proposal would increase the state fuel tax by $0.02 per year over four years, and index the tax to inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. afterward. It would also phase out the 4 percent individual and corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. bracket. These adjustments would modify revenue sources and targets while keeping overall state revenue projections roughly consistent with current levels.
Mississippi’s Infrastructure Disrepair Warrants a Smarter Fuel Tax
Currently, Mississippi levies an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on fuel at a rate of $0.18 per gallon, with revenue directed specifically toward state highway programs. This $0.18 rate is not indexed to inflation and has been left unchanged for nearly three decades. As it stands, Mississippi has one of the lowest gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. rates in the country and the lowest among all bordering states. At the same time, Mississippi – like many other states – faces an annual infrastructure funding shortfall, estimated at $400 million. If this revenue shortfall estimate doesn’t speak for itself, the bridge closures certainly do: Mississippi’s stagnant gas tax simply isn’t generating sufficient revenue to maintain the state’s highway infrastructure networks.
While some in Mississippi may express concerns about generating additional revenue through an increased gas tax, a fuel excise tax is the best situated revenue option to ensure the taxpayers who collectively contribute to the wear and tear on Mississippi’s roads are the same taxpayers who are paying for the maintenance of those roads. It also allows the state to ensure that it has adequate funding for its infrastructure needs.
Mississippi’s Taxpayers Deserve a Simpler, Flatter Income Tax
With a graduated structure and rates set at 3 percent, 4 percent, and 5 percent, Mississippi’s current income tax system is unnecessarily complex. While Mississippi’s top income tax rate, set at 5 percent, is fairly competitive with the rates of neighboring states, Mississippi should make continued progress toward a flatter income tax structure.
The Taxpayer Pay Raise Act of 2016 took a step in the right direction by initiating phaseout of the 3 percent rate, which took effect in 2018 and will be fully phased out by 2022. The 3 percent bracket applies to the first $5,000 in income. Speaker Gunn’s new proposal builds upon that base by phasing out the state’s 4 percent income tax bracket, which applies to the next $5,000 in income (from $5,000 to $10,000). If adopted, the first $10,000 in income (plus any applicable exemptions or standard deductions) would be exempt from the state’s income tax, targeting the benefit to low-income households.
In the fall of 2016, following that law’s enactment, Nicole Kaeding testified three times before the Mississippi Tax Policy Panel, recommending further consolidation of the state’s individual and corporate income tax brackets and the indexing of a consolidated bracket to inflation. That recommendation is a key component of Speaker Gunn’s plan.
Improving Mississippi’s Tax Climate
The combination of policies in Speaker’s Gunn tax swap package would also improve Mississippi’s competitiveness. When fully phased in, the plan would improve Mississippi’s ranking on the State Business Tax Climate Index from 24th to 19th best in the country.[1]
| Current | Speaker Gunn’s Proposal | |
|---|---|---|
|
Overall |
24 | 19 |
|
Corporate Tax |
11 | 11 |
|
Income Tax |
20 | 18 |
|
Sales Tax |
38 | 39 |
|
Property Tax |
35 | 35 |
|
Unemployment Tax |
5 | 5 |
A Tax Swap Would Help Repair Bridges While Creating a Better Tax Code
There are many ways Mississippi could adjust its tax code to increase infrastructure funding, but few proposals would simultaneously improve the state’s tax code. Pairing an income tax cut with a gas tax increase allows the state to accomplish multiple goals at the same time. It dedicates adequate funding toward the state’s highway infrastructure needs while targeting income tax cuts to those at the lower end of the income spectrum, mitigating any perceived regressivity from the gas tax increase.
Should Mississippi choose to increase its gas tax, phase out its graduated income tax structure, and index the gas tax to inflation, the state will be well on its way to repairing its bridges while creating a smarter system that better serves its taxpayers.
[1] This does not include the impacts of the state’s ongoing franchise tax elimination, but does include the elimination of the 3 percent income tax bracket. Mississippi’s rates and brackets for individual and corporate income are currently tied together. This score assumes that that continues.
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