Special Report No. 161
Introduction and Executive Summary
Good state 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. systems levy low rates on a broad base, and treat all taxpayers the same while minimizing economic distortions. The more riddled a tax system is with special preferences, the less likely it is that business decisions will be made in response to market forces. As companies become increasingly sophisticated and our global economic system increasingly integrated, jobs and growth will increasingly flow to low-tax and low-burden jurisdictions.
The Tax Foundation’s 2008 edition of the State Business Tax Climate Index, released in October 2007, ranked Mississippi as the 18th best tax climate in the country. Regionally, Mississippi is about middle-of-the-pack compared with Florida (5th), Texas (8th), Missouri (15th), Tennessee (16th), Georgia (20th), Alabama (21st), Louisiana (32nd), and Arkansas (35th). Similarly, in our 2007 edition of State and Local Tax Burdens, which calculates the tax burden as a percentage of income, Mississippi ranked about middle-of-the-pack nationally (29th highest state-local tax burden). Improving the state’s business tax climate and reducing state and local tax burdens could give Mississippi a comparative advantage in its region.
In early 2008, Governor Haley Barbour announced the creation of the Mississippi Tax Study Commission, which is tasked with preparing a comprehensive study of the state’s tax system and recommending suggested improvements. One specific aspect the Commission has been asked to examine is how Mississippi’s state tax system functions in combination with the federal tax code. The Commission, which brings together members with a wide range of business, legal, academic, and legislative expertise, has been instructed to prepare a report of its findings by August 31, 2008.
This fresh and all-inclusive look at Mississippi’s tax system by an independent panel represents a great opportunity for the Magnolia State to reform its tax system in accordance with the principles of sound tax policy. By applying these principles, and reviewing the state’s current performance as described by the State Business Tax Climate Index, we can identify several areas ripe for improvement.
In the area of business taxation, Mississippi should (1) repeal at least one of its corporate franchise, inventory, and intangibles taxes, thus reducing compliance and tax burdens while giving the state a comparative advantage over its neighbors; (2) resist calls to raise corporate tax rates or add new brackets, which would be at odds with the global trend of attracting business by lowering corporate tax rates; (3) flatten brackets because multiple rates on corporate income achieve no logical or progressive goal; (4) adjust brackets annually 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. and conform to the federal tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , to reduce compliance costs; (5) eliminate or reduce special incentives; and (6) resist calls to adopt economic nexus.
In the area of sales taxes, Mississippi should consider (1) eliminating the 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. on machinery and other business-to-business transactions, to reduce tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. and economic distortions; (2) broadening the sales tax base while lowering the sales tax rate, to improve neutrality and reduce administrative complexity; and (3) avoiding gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. es, which are economically harmful and distorting.
In the area of personal income taxes, Mississippi should consider (1) flattening brackets, adjusting brackets annually for inflation, and conforming to the federal tax base, all to reduce compliance costs; and (2) resisting calls to raise personal income taxes or add additional brackets, which would punish entrepreneurs vital to economic growth and give up one of the state’s best competitive advantages.
Elsewhere, Mississippi should aim to improve budget transparency and avoid reliance on cigarette or gambling revenues. Ireland, once a poor country, has successfully used its newly lowered corporate tax rate to attract massive amounts of new capital investment, dramatically lower unemployment, and become the “Celtic Tiger,” leaping past its neighbors in economic and job growth. Likewise, the report of the Mississippi Tax Study Commission will give the Magnolia State an excellent opportunity to improve its tax climate and become an attractive place for capital, jobs, and entrepreneurs compared to its regional, national, and international competitors.Share