A few thoughts on income taxes

*Appeared in the Laurel Leader-Call newspaper 

I recently spoke at the Mississippi Economic Development Conference about income taxes.  Never one to shy away from giving my opinion, I thought I’d share with readers some thoughts I have about how Mississippi lawmakers should move forward – or not – in reforming the state’s income tax structure. 

First things first, let’s be honest.  Changing the state’s income tax structure isn’t a magic solution to all of Mississippi’s problems.  For what it’s worth, most lawmakers (from leadership to the so-called “rank and file”) recognize this.  Leaders like Speaker Gunn and Gov. Reeves have said eliminating the income tax would do more to promote our economic growth than other proposals, and I think they’re right.  But we must remember, and our leadership does, that improving our state isn’t a one-and-done project.  

 

With that caveat in mind, let me say that I think eliminating the income tax – a penalty on work – is a completely worthwhile goal.  Not only does it get rid of a tax policy that punishes you for working, it also signals to the nation that Mississippi is open for business.  It enhances our ability as a state to attract new industries and improves our business climate, which aids in job creation.  These are good things.

 

But some not so good things can come from misguided tax reform efforts. The initial version of the tax reform bill, dubbed the “Mississippi Tax Freedom Act,” included increased taxes on business inputs. 

 

(Business inputs, as defined by the Council on State Taxation, are intermediate goods and services that are resold to produce other goods or services that are then sold to households. Clear as mud, right?) 

 

What does this mean?  In a nutshell, it means increasing the cost of doing business in Mississippi, which puts us at a competitive disadvantage when competing against surrounding states for jobs.  It means increases in the cost of goods to consumers and reduced purchasing power.  

 

(Side note: House leadership removed these taxes on inputs from a revised version of the bill during the 2021 legislative session. And rumor has it that next year’s “Tax Freedom” bill won’t include these components, either.) 

 

Something else to consider when reforming the state’s income tax structure is the de-coupling of personal and corporate income taxes.  Right now, corporate and personal income taxes are tied together – “coupled,” if you will – in state law.  The House bill proposed to separate these two taxes by eliminating the individual income tax while leaving the corporate income tax on the books.

 

The former staffer in me worries what this might mean for the future of legislative revenue-raisers, i.e., future tax increases.  Lawmakers might look to the corporate tax rate to raise revenue to “pay for” the cost of eliminating the personal income tax, or they might look to this tax as a way to pay for costs of government, such as education, public safety, and mental health. 

 

Said another way, the corporate tax will have a big ole target on its back when lawmakers need additional revenue in the future.  Raising the corporate tax rate will put us at an competitivedisadvantage and will have the practical impact of increasing the costs of goods, since most companies will likely pass along any new costs to consumers.

 

For these reasons, I don’t think lawmakers should decouple the personal and corporate income tax. 

 

Finally, let’s talk tax increases and whether they’re necessary. The House bill would have eliminated the personal income tax, reduced the grocery tax, and raised the general sales tax rate.  To quote Meat Loaf, “two out of three ain’t bad.”

 

I’ve never seen a tax reduction I didn’t like, but I do question the necessity of including a reduction in the grocery tax if it means we must increase the sales tax rate at a higher level.  I’m not opposed to raising the sales tax, because I tend to believe consumption taxes are among the fairest taxes, but lawmakers must ask themselves a couple of questions.

 

First, is a tax increase absolutely necessary?  Answers here are complicated. The answer may be yes from a political negotiating standpoint; I am not part of those conversations. Lawmakers may also see no other way to provide funding for government services if they carve out some $1.8 billion of personal income tax revenue without an offsetting tax increase.

 

Second, if a tax increase is concluded to be necessary, what’s the lowest rate increase possible? This question depends on several factors, including how much revenue lawmakers are trying to find.  The more taxes are cut on one hand, the higher the sales tax rate increase must be on the other.  It’s a difficult balance, but with enough thoughtfulness, I believe lawmakers can find the right approach to simplifying the tax structure without going too deeply in citizens’ pocketbooks. 

 

I’ll end my tax diatribe by saying this: I commend lawmakers for wanting to eliminate the tax-on-work.  It’s a worthy goal.  But in the midst of their negotiations, I hope they will keep in mind the unintended consequences of certain tax policies that may impact the fiscal health of our state and our residents.