Not to rain on Mississippi government’s recent budgeting parade, but it’s looking more and more as though a recession later this year or next is likely.
Already, there are signs that the post-COVID boom could be tapering off.
In May, transfers from the collection of sales, income and other taxes to the state’s general fund were up 3.5%, compared to an average of 11.3% for the previous 10 months. Total fund transfers in May were up less than 1%, compared to nearly 12% for the previous 10 months.
The amount of sales tax transferred, a good indication of economic activity, is particularly noteworthy. In May, it fell by 1%, after growing by an average of 13% the previous 10 months.
Yet to be seen are the impacts of the recent interest rate hikes by the Federal Reserve. The Fed is trying to bring down inflation without triggering a slump in spending. Many economists have said it’s unlikely that the Fed will be able to pull it off, as higher interest rates usually slow business expansions, home sales, car sales and the purchase of other big-ticket items that require financing.
Thus, after spending the past year with more money than it knew what to do with, belt-tightening could again be the order of the day when the Mississippi Legislature convenes next January.
Compounding the problem if a recession takes hold could be the income-tax cut that begins phasing in next year. The tax cut, the largest such cut in state history, is projected to reduce state revenues by $185 million in the first year and $525 million annually by the time it is fully implemented in 2026.
If the tax cut doesn’t produce the burst in economic activity that proponents promised, the state could be pinched to perpetually fund that huge teacher pay raise lawmakers also passed this year, on top of all the other big expenses that could soon come calling because of lawsuits challenging the state’s prison and mental health systems.
The Legislature would have been wiser to have passed a onetime tax rebate, rather than an ongoing income tax cut, as a hedge against the probability that the large surpluses in the state treasury would not last.
Thankfully lawmakers were not so foolish as to completely eliminate the income tax, as Gov. Tate Reeves wanted and still wants.