Mississippi’s Senate leaders continue to make the most sense when they say the state needs to go slow about implementing additional tax cuts.
This week, House Speaker Jason White convened his tax summit, where it again was made clear that he and members of his chamber are more gung ho about further deep tax reductions than are those in the opposite chamber.
The House wants to completely phase out the personal income tax, which is already in the process of being scaled down to a flat 4%, and also reduce the 7% sales tax on groceries.
The House leadership and Gov. Tate Reeves argue not only that Mississippi can afford these cuts, given the large surpluses the treasury has experienced the last several years, but also the reductions will stimulate greater economic activity and in the process make up for the income tax losses to the state with higher sales tax collections.
Neither of these claims is certain.
Yes, the state has been enjoying large surpluses even while spending more money annually for several years running, but these surpluses are probably a temporary boon. They’ve been largely fueled by the unprecedented amounts of money — $33 billion, according to Senate Finance Committee Chairman Josh Harkins — that were poured into Mississippi in federal relief funds for state and local governments, schools and hospitals, and private businesses and individuals. That impact is going to be fading over time.
In addition, the uptick in sales tax collections is probably more due to inflation than to previous income tax cuts. On average, what cost $1 in February 2020, just before the outbreak of COVID-19, costs $1.22 today. Thus, the state, merely due to higher prices, is collecting 22% more in sales tax on the same goods and services being purchased. With inflation now moderating back toward the 2% to 3% annual level, so will sales tax collections.
Given both of these probabilities, can the state really afford to eliminate the state income tax, which, according to Harkins, would take another $2.2 billion annually out of the treasury? And do it while also cutting hundreds of millions a dollars a year from the sales taxes collected on groceries?
Shouldn’t legislators wait to see the full effects of the previously huge income tax cut, which doesn’t fully phase in until 2026? And what about the impact of the next recession? It’s a minor miracle that the country did not experience one when the Federal Reserve hiked interest rates to bring inflation under control, but this good fortune cannot last forever. The economy is cyclical, and it’s going to turn down at some point. It’s just a matter of when events in this country or abroad trigger it.
The Senate urges caution. The Senate is right.
