Mississippi’s Pro-Growth Tax Swap Proposal

February 15, 2018

Representative Charles Busby (R) in Mississippi has proposed a plan that would eliminate an income tax bracket, while increasing the tax rate on fuel. The swap would allow Mississippi to transition from taxes on income to taxes on consumption and final users, reducing burdens on investment and aligning the government services taxpayers benefit from to the taxes used for their expenses.

The plan attempts to phase out the 4 percent tax bracket on income between $5,001 and $10,000, a move building upon 2016 legislation that initiated the phasing out of the 3 percent bracket on the first $5,000 of income. If passed, Mississippi would achieve a flat tax rate of 5 percent on income over $10,000, along with a $2,300 standard deduction and a $6,000 personal exemption, meaning that the first $18,300 in income would be exempt from taxation for a single individual in Mississippi.  

The fuel tax would add $0.03 to the price at the pump each year, over the course of four years for gasoline and five years for diesel, resulting in a total added tax of $0.12 and $0.15, respectively. Following the phase-in, the fuel tax would then be indexed for inflation. As it stands, Mississippi has one of the lowest gas taxes in the country at 18.79 cents per gallon, and the lowest among all bordering states. Following the increase, Mississippi would be ranked in the top ten nationally for highest fuel taxes.

The proposal would also result in annual fees of $300 on electric vehicles, and $150 on hybrid vehicles, to account for people broadly unhampered by the increased fuel tax.

The Mississippi Department of Revenue estimates a $165 million reduction in income for the state stemming from the tax cut; however, the implementation of the gas tax would supplement the loss by providing $302 million to the budget, resulting in a positive revenue stream overall.

While some in Mississippi may express concerns about increasing the state’s revenue through a consumption tax, the state has struggled meeting a backlog of infrastructure needs, particularly with roadways. Currently, 28 percent of Mississippi roads are in poor condition, and 12 percent of bridges are deemed as structurally deficient. An estimated $400 million a year in additional revenue is needed to compensate for these inadequacies.

As of fiscal year 2014, fuel taxes only covered 36 percent of Mississippi’s state and local spending on roads. The proposal would divert the state from using general revenue for the transportation budget, successfully allowing Mississippi drivers to more directly finance the expenses of the roads and bridges they benefit from. This proposal builds on the great progress Mississippi has made in recent years towards stronger tax policy.

Although the move may be regarded as regressive as it now forces low-income earners to pay more for gas, the simultaneous elimination of the 4 percent income tax rate, coupled with the recent phaseout of the 3 percent rate, would help to compensate these taxpayers for the increased prices at the pump, mitigating concerns about regressivity.  

The transition to a flat tax rate would allow the state to simplify its tax code, making tax compliance easier for Mississippians, while only increasing an already low fuel tax rate relative to bordering states. The proposed bill would raise much needed revenue for its struggling infrastructure, and points Mississippi in the right direction towards a simpler, more neutral tax code.

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