Mississippi lawmakers entered the 2022 legislative session with the motivation and resources to implement income 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. reductions and, despite stark contrasts in approach, concluded by delivering meaningful relief for taxpayers.
The Mississippi Tax Freedom Act of 2022 (HB 531) began the session as an effort to totally repeal the 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. , a proposal we critiqued as unbalanced. The energy surrounding the bill was matched by concern over its impact to fiscal sustainability. Few lawmakers questioned the benefits of income tax relief, but there was disagreement over the scale of reform necessary to foster meaningful economic growth. In the waning days of the regular session, policymakers delivered the largest tax cut in state history, and they did so by refusing to take an all or nothing approach.
For some, the reform bill may feel like a compromise, but it nevertheless provides rapid, meaningful tax relief for Mississippians while setting conditions to attract long-term investment to the state. On both fronts, Mississippians win. The calendar year (CY) 2023 repeal of the 4 percent marginal 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. (applicable to 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. between $5,000 and $10,000) will allow single and married taxpayers to take home up to $200 more than in 2022. Some may deposit the savings, but many more are expected to spend it. This will likely translate to a short-term boon for businesses and a surge in sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. revenue for the general fund.
While certainly a positive development, Mississippians should not expect the elimination of the 4 percent bracket to spur long-term economic growth. In tax systems with low-level marginal rate thresholds (like Mississippi’s), intermediate rate cuts do little to remove barriers to labor or to encourage greater productivity.
In contrast, reductions to the top marginal rate do encourage greater productivity, and that is the long-term win for the Magnolia State. Under provisions of HB 531, the top individual rate is set to decrease from the current 5 percent to 4 percent by CY 2026 (4.7 percent in CY 2024 and 4.4 percent in CY 2025). Importantly, the rate reductions circumvented the employment of unwieldy personal exemptions, which could have been upwards of $75,000 for joint filers under earlier versions of the bill. The final approach is structurally simple and competitive.
Once phased in, no southern state with an income tax will have a lower top marginal rate than Mississippi. Alabama’s top marginal rate is 5 percent. Under Arkansas’s most recent round of reforms, revenue triggers could lower the top rate to 4.9 percent by 2025. Louisiana’s 2021 rate reduction established a top rate of 4.25 percent. From the perspective of its neighbors, Mississippi owns the new benchmark.
Nationally, among states that levy an individual income tax, only five (Arizona, Indiana, Iowa, North Dakota, and Pennsylvania) are currently on course to have a lower top marginal rate than Mississippi in 2026. The Tax Foundation’s State Business Tax Climate Index is designed to show how well states structure their tax systems. As a result of the recently legislated reforms, Mississippi will catapult from its current position of 30th overall to 19th in the nation. In terms of the individual income tax system alone, the Magnolia State will advance from 25th to 16th. Mississippi’s new scores will markedly outperform every immediate neighbor and many other states in the South.
Although the tax landscape across the country is still dominated by progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. rates, an increasing number of states are transitioning to a flat rate individual income tax system. Next year, Mississippi will become at least the 10th state with a flat rate tax on wage income. Iowa will join those ranks in 2026, and Arizona could do so as well if revenue collection continues apace and voters approve a flat rate ballot measure this November. Georgia and Oklahoma are exploring a shift to single-rate taxes as well.
Another reason HB 531 is a policy victory for Mississippians is because it improves the state’s tax neutrality, thus lowering barriers to productivity. As workers and business owners consider the impact of taxation on their next dollar of income, they implicitly consider the extensive and intensive effects of taxation (whether to work/invest and how much to work/invest). The lower, flat rate of HB 531 is likely to promote in-migration which affects the extensive amount of employment (how many people work) in Mississippi. And reducing the 5 percent rate is likely to have an effect on the amount of work people choose to perform. When workers can take more of their next dollar home, it will, on the margin, incentivize those already employed to work an additional term (hour, week, full time vs. part time).
Additionally, the ongoing migration from high- to low-tax states, and particularly states with low income taxes, is likely to accelerate with the growing viability of telework. Increasingly, many people will be able to live wherever they wish. Those who are highly sensitive to taxes will find it easier than ever to relocate to jurisdictions with lower tax burdens, regardless of where their employer may be located. Employers themselves will have more location flexibility as geography becomes less of a constraint on their workforces. With the passage of HB 531, Mississippi is actively setting the conditions necessary to attract these workers.
Another of HB 531’s laudatory features is its prudent employment of surplus revenue to guarantee the provision of essential services. The final bill judiciously forgoes economically inefficient grocery tax cuts in favor of economically meaningful income tax rate reductions.
Income tax reduction is good for economic growth, because tax rates influence how much people work; and all things being equal, it makes a difference in where people choose to live. According to one study, over the past decade, states which forgo individual income taxes have seen their populations grow at twice the national rate. But while competitive rates are an important reason for this growth, they are not the only reason. As Mississippi moves forward under the reforms of HB 531, budget sustainability will continue to play an important role in realizing the full potential of the bill’s structural alterations.
Notably, the final version of HB 531 does not include restrictions on general fund growth. Limits to revenue growth are not inherently wrong, but earlier proposals would have imposed a hard 1.6 percent cap on general fund growth. That rate would have been lower than the 2 percent 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. target set by the Federal Reserve and far below the 7.9 percent 12-month inflation rate reported earlier this month. As with any other consumer, government revenue growth must match the inflation rate if purchasing power is to remain constant. The wrong timing or wrong combination of revenue reductions and spending restrictions could make service delivery especially challenging. Mississippi policymakers were wise to avoid inadvertently fashioning unfunded liabilities.
Nested in the closing paragraphs of the final bill is the intent of the legislature to address further individual income tax cuts before 2026. In that sense, the door was not completely closed on the idea of total income tax repeal. It will ultimately be up to Mississippians and their elected representatives to determine what the tax structure looks like in years ahead, but “getting to zero” will likely require strict fiscal discipline and difficult choices within the state’s budget. As policymakers continue to debate those ideas, they should remain clear-sighted about the trade-offs.
Mississippi policymakers should be lauded for their willingness to revise proposals to achieve a sustainable, pro-growth outcome. We analyzed both the 2021 legislation and the preliminary 2022 proposals and suggested means of achieving better balance. In-state groups, particularly Empower Mississippi, offered ways forward that achieved the goals of tax reform and tax relief while avoiding the issues raised by prior plans. And lawmakers worked to ensure that the legislation they passed represented structurally sound, sustainable pro-growth tax relief.
Income tax reduction can be an effective treatment for economic ailments, but it tends to fall short as a panacea. Income tax relief is, after all, a means to an end—not an end in itself. The ultimate goal is economic growth and prosperity, so how a tax is paid for—what revenue offsets, or what spending reductions—remains an important consideration. Mississippians will have the next four years to debate the future, but for now they should reflect on a policy that has produced wins on nearly every front.