States tend to engage in 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. competition, and now Mississippi is proving that elected officials do too, with three separate tax relief packages circulating in the Magnolia State.
Governor Phil Bryant (R) kicked things off last year when he outlined his 2016 budget recommendations, proposing a $78.7 million targeted tax reduction for low- and middle-income taxpayers, yielding an average tax cut of $250 per year for about 300,000 households. Once the legislative session began, Lieutenant Governor Tate Reeves (R) unveiled his own $382 million tax reduction proposal, which we detailed previously. And now Speaker Philip Gunn (R) has proposed phasing out the state’s individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. entirely by 2030. A brief look at each is warranted.
Governor Bryant’s Proposal
Governor Bryant has expressed support for the Lieutenant Governor’s tax plan, so the details of his proposal may be moot, but it’s worth describing them briefly. The Bryant plan would largely mirror the federal Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , with two differences: firstly, the state credit would be non-refundable, so it wouldn’t be available to those who owe no income taxes, and secondly, the Mississippi credit would only be available in years where state revenue grew by at least 3 percent and the state’s rainy day fund was adequately funded. Based on current data, the plan would result in a tax cut of $78.7 million per year. The Bryant plan also assumes $60 million in revenue from greater compliance with existing taxes as a result of hiring additional auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. ors.
Lieutenant Governor Reeves’ Proposal
As we have outlined previously, the Reeves proposal would:
- Phase out the state’s 0.25 percent franchise tax over ten years,
- Phase out income taxation on the first $5,000 of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. over five years, and
- Increase the self-employment deduction to allow self-employed individuals to deduct up to one-half of their self-employment taxes paid.
The plan would result in a $382 million per year tax reduction once fully phased in.
Speaker Gunn’s Proposal
While the Governor proposed a small tax cut targeted at lower-income Mississippians and Lt. Governor Reeves blended low-income tax relief with cuts aimed at economic expansion, Speaker Gunn offered something considerably larger: the complete elimination (over time) of the state’s individual income tax, which is projected to bring in $1.81 billion in fiscal year 2016.
The phase-out begins one bracket at a time. The first step would be eliminating the 3 percent bracket on the first $5,000 of income between 2017 and 2018 (also proposed under the Reeves plan, albeit over a different time horizon). This would be followed by the phased-in repeal of the 4 percent bracket on $5,001 to $10,000 of income between 2019 and 2022. The larger cuts don’t begin until 2022, when the legislation would start whittling away at the 5 percent bracket on income over $10,000, reducing the rate half a percent at a time through 2029, followed by full repeal in 2030.
This assumes, however, that the state experiences consistent revenue growth. Like the Governor’s targeted income tax reductions, the Speaker’s plan relies on revenue triggers, with each year’s scheduled reduction contingent upon a minimum of 3 percent growth in General Fund revenue collections over the preceding year. With the individual income tax accounting for nearly a third of general fund revenues (a projected 32.2 percent in FY 2016), Mississippi would require substantial revenue growth from other tax sectors to hit revenue triggers in years immediately following a rate reduction. It is not unreasonable to assume that the phase-in could take substantially longer than the fourteen years outlined in the rate reduction schedule.
Given the structure of the triggers and the size of the proposed cuts, the proposed triggers make it highly likely, but do not strictly guarantee, that General Fund revenue upon completion of the phase-in would be greater than revenue at the outset. If the legislature wished to impose such a requirement, the trigger mechanism could be adjusted to accomplish that purpose.
Nine states forego an individual income tax—including the neighboring states of Texas, Tennessee, and Florida, all three of which make do on lower state tax collections and overall revenue per capita than Mississippi does. That being said, if Mississippi were to adopt Speaker Gunn’s proposal to fully eliminate the tax, it would not be a trailblazer in that regard. The current tax is, however, responsible for nearly a third of General Fund revenue and 15.5 percent of the total state budget (including federal transfers).
Governor Bryant’s proposal would provide modest relief to low-income taxpayers, but would be unlikely to have much of an impact on economic growth. And Lt. Governor Reeves’ proposal, which targets distortive business taxes, would have perhaps the strongest impact on growth per dollar of cuts, but is one-fifth the size of Gunn’s plan.
The Reeves plan passed the Senate 38-9, while the Gunn plan cleared the House 83-32, leaving Mississippi legislatures with two dramatically different approaches from which to choose—or perhaps pick and choose.
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