Mississippi Turns to Lottery, Other Tax Changes, in Special Session to Fund Bridge Repair

In a five-day special session that concluded August 29^th, Mississippi lawmakers reached an agreement to reduce the state’s $400 million per year infrastructure funding shortfall, a plan that includes several 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. changes. As of mid-August, more than 400 locally-owned bridges remained closed, with another 1,700 subject to weight restrictions, due to safety concerns and insufficient funding for repairs.

The Mississippi Legislature considered three bills during the special session, all part of a broader infrastructure plan spearheaded by Governor Phil Bryant (R), which garnered support from both sides of the aisle. Two of the bills, Senate Bill 2001 and House Bill 1, have notable tax implications.

Senate Bill 2001 establishes a state lottery with proceeds dedicated to infrastructure through June 2028. Under this legislation, at least 50 percent of gross revenue from the sale of lottery tickets must be awarded in prize money, while no more than 15 percent can be used to cover the overhead costs of administering the lottery. The remaining proceeds, around 35 percent of gross revenue from the sale of lottery tickets, will be transferred to the State Highway Fund.

Early projections indicate the lottery could generate approximately $80 million annually for infrastructure. However, legislators should use caution to avoid overestimating long-term lottery revenue projections. While some Southeastern states have seen growth in their inflation-adjusted lottery revenues over the past decade, more states have seen their lottery revenues decline, particularly those states that have had a lottery for several decades. Further, as Mississippi already has a riverboat gaming industry, the new lottery could potentially cannibalize some of that revenue.

Until now, Mississippi was among six states without a lottery. While playing the lottery is voluntary, paying the excise tax implicit in the price of lottery tickets is not voluntary. The lottery tax should therefore be regarded similarly to other excise taxes, such as those levied on alcohol and cigarettes.

As a supplement to the lottery, House Bill 1, the Mississippi Infrastructure Modernization Act, makes several tax changes designed to increase funding for Mississippi’s roads and bridges, including:

• A provision to dedicate a portion of Mississippi’s use tax revenue toward infrastructure. By August 2020, 30 percent of Mississippi’s use tax revenue will be dedicated to assisting counties and municipalities with infrastructure repair and construction, and 5 percent will be transferred to the Local System Bridge Replacement and Rehabilitation Fund. Following the U.S. Supreme Court’s Wayfair decision, the Mississippi Department of Revenue issued guidance expanding online 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. collection responsibilities to remote sellers beginning September 1, 2018. However, policymakers should consider further legislative changes to improve the viability of Mississippi’s remote sales tax collection laws in the event of a legal challenge.
• A new annual motor vehicle privilege tax of $150 for electric vehicles and $75 for hybrid vehicles. This tax rate will adjust for 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. starting in 2021. Mississippi already levies privilege taxes on other motor vehicles that vary by vehicle type, including standard passenger vehicles, motorcycles, and pickup trucks. The relatively higher taxes on electric and hybrid vehicles appear designed to compensate for lower overall 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. revenue generated by those vehicles, but this type of tax does not take into account the amount of driving a taxpayer does in a given year and is therefore a limited proxy for road usage.
• A new “environmental protection fee” levied on motor fuel distributors at a rate of four-tenths of one cent per gallon, with revenues directed to both the Mississippi Groundwater Protection Trust Fund and the State Highway Fund. To the extent this “environmental protection fee” is used to generate revenue for the State Highway Fund rather than to simply recoup the costs of providing a service to specific beneficiaries, it may meet the legal definition of a tax rather than a fee.
• A provision dedicating revenue from the tax on sports betting, which was recently legalized in the state, to the State Highway Fund through June 2028, and then to the General Fund. While the introduction of a new legal market for gambling brings with it an initial surge of activity and revenue, long-term revenue is difficult to predict. The tax rate on legal gambling plays a role in how much activity is shifted away from the black market, and as new competition enters the market, revenue can be expected to fluctuate.

Earlier this year, House Speaker Philip Gunn (R) floated a “tax swap” proposal, which would have phased in a gas tax increase of two cents per year over four years, and then indexed the final rate for inflation, while reducing individual income taxes to offset the gas tax increase. We wrote about the benefits of the tax swap plan; namely, using a tax on road usage to fund infrastructure improvements that primarily benefit road users.

This time around, lawmakers ultimately opted to use piecemeal tax changes as part of their approach to infrastructure funding, and they walked out of this month’s special session with a plan to address the state’s most urgent infrastructure repair needs. However, ten years from now, when lottery tax revenue and sports betting tax revenue are no longer allocated to infrastructure, and revenue trends are reanalyzed, legislators may again face a set of challenging decisions related to infrastructure funding.

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