The Tax Foundation

July 18, 2008

Economic Growth Requires Bold Steps: Mississippi Should Consider Tax Reform Recommendations

by Joseph Henchman

It's almost August, and that means the Mississippi Tax Study Commission should be working its way toward final recommendations. In early 2008, Governor Haley Barbour announced the creation of the Commission, which is tasked with preparing a comprehensive study of the state's tax system and recommending improvements. Bringing together a wide range of business, legal, academic, and legislative expertise, the Commission must submit a report of its findings by August 31, 2008.

In March, the Tax Foundation presented Special Report No. 161: An Opportunity to Improve Mississippi's Tax Climate, analyzing Mississippi's tax system and making recommendations for improvements. In doing so, we relied on our principles of sound tax policy: that good state tax systems levy low rates on a broad base, and treat all taxpayers the same while minimizing economic distortions.

While it is true that Mississippi's tax system is about middle-of-the-pack regionally, mediocrity is no cause for celebration. States with the courage to undertake comprehensive review of their tax systems do so because they want better economic performance and to become a hub of business and consumer activity. States such as Mississippi should keep in mind regional, national, and international competition for capital, jobs, and entrepreneurs, and adopt a tax system that acts as a welcome mat to all players on a neutral basis.

The Commission responded positively to our presentation and we are hopeful that they keep our suggestions in mind, which we briefly reiterate here.

• Consider Repeal of the Corporate Franchise Tax. This economically damaging part of Mississippi's tax code (imposing a $2.50 levy for every $1,000 in capital that is held, invested, or employed by a business) hits firms even when they are not profitable, and the burden of calculating it prevents Mississippi from attracting multi-state and multi-national corporations. Its abolition would give Mississippi a boost, even if the revenue were made up elsewhere.
• Consider Repeal of the Inventory Tax. Inventory taxes, levied on the value of a company's inventory, exist in only 15 states. They are especially harmful to large retail stores and others that have large amounts of merchandise. They distort economic decisions because they force companies to make business decisions based on minimizing tax burdens, rather than economic activity. They create strong incentives to move inventory (such as warehouses and shipping facilities) to other states. An income tax credit is an insufficient solution, since it would maintain the economic distortions and the burden of calculating the tax, and less-profitable companies would be unable to take the credit. For these reasons, many states repealed their inventory taxes. If Mississippi joined them, it could enjoy a regional advantage over neighboring states that (for the moment) still have inventory taxes.
• Consider Repeal of the Intangibles Tax. According to Mississippi Code § 1-3-41, § 27-35-31, and § 27-35-33, taxes on business and personal property also apply to intangible property, such as funds on deposit, promissory notes, rights of court judgments, stock certificates, and bonds. Only four states tax such intangibles, a tax that is highly harmful to businesses that hold large amounts of their own or other companies' stock.
• Eliminate the Sales Tax on Machinery and Other Business-to-Business Transactions. Mississippi is one of only 15 states to impose sales tax on purchases of manufacturing machinery. Businesses have been known to avoid locating facilities or factories in states where the factory's machinery would be subject to state sales tax. Eliminating the tax would make Mississippi more attractive to such projects.
• Conform Mississippi's Corporate and Individual Income Taxes to the Federal Tax Base, and Adjust Brackets for Inflation. Requiring businesses and individuals to calculate income twice under two different systems imposes a heavier tax compliance burden. Conforming Mississippi's tax base, as well as flattening income and corporate tax brackets, would considerably lower these costs. Similarly, indexing brackets for inflation would prevent individuals from being pushed into higher tax brackets each year even though their real income remains the same.
• Avoid Cigarette Tax Increases. Mississippi should be careful not to rely on cigarette taxes as a long-term source of revenue because it puts the state in the position of relying on a tax on an activity imposed with the justification of reducing the activity. Numerous studies have shown cigarette taxes to be highly regressive, with the poor bearing a disproportionate share of the tax burden. Evasion and compliance costs undermine many of the asserted benefits of such tax increases. Mississippi should avoid such reliance on cigarette taxes.

These recommendations also do not consider bolder steps that Mississippi could undertake, such as repealing one of the major taxes (income, corporate, sales), that would greatly improve its competitive position. Such actions should be considered as part of a comprehensive analysis.

Serious tax reform in Mississippi should consider these recommendations and address the underlying concerns. Leaving problematic taxes such as the franchise tax, inventory tax, and sales tax on machinery unaddressed would preclude the move Mississippi hopes to make from middle-of-the-pack tax climate to growing hub of commercial activity.

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