Mississippi Gov. Tate Reeves seems to be taking his reelection victory in November as a mandate for a longstanding priority: elimination of the state’s personal income tax.
With two whacks at the tax taken since 2016, however, a pause is in order until the state has a clearer picture of the impacts of these previous rounds of reductions.
It’s too early to say for sure what those impacts are, since both of the tax reductions are still being phased in. The indications are a bit worrisome.
The latest figures in Mississippi, released in early December, showed tax collections in decline after a couple of years of remarkable growth that produced record surpluses in the state treasury.
Five months into the current budget year, total collections for state government are down $42 million from the year before, or 1.4%. All of that decline and then some can be chalked up to the decline in individual income taxes, which have fallen $119 million, or 11%.
The state economist, Corey Miller, recently told legislators that the primary reason for this year’s overall revenue decline is the 2022 income-tax cut, which is in the first year of a four-year phase-in. He also noted, however, that the slowdown in income tax collections actually began last year, when the large amounts of federal payments related to COVID-19 came to an end.
The previous two income tax cuts were called the largest in state history at the time they were enacted. Should Reeves’ push come to fruition, however, it would easily top both of those combined.
Before the Legislature considers another such massive change to the tax code, it should wait for proof that the previous tax cuts live up to their promise. Those were supposed to generate so much additional economic activity that what was lost in income-tax collections would be more than made up in sales-tax revenues. That hasn’t fully happened, and there are still three years of the phase-in of the 2022 reductions to take effect.
When the phase-in is completed, Mississippians will pay a flat 4% tax on all taxable income above $10,000. That’s a modest amount, considering the graduated federal income tax starts at 10% and goes as high as 37%, depending on a person’s income.
Reeves and other proponents of eliminating the state income tax say Mississippi is losing the competition for people to states that have no income tax. What they fail to mention, though, is these states with no personal income tax usually have higher taxes in other areas, most notably in property taxes.
The revenue to operate state government has to come from somewhere. Before Mississippi puts itself into a bind from cutting too much too soon from the income tax, it would be wise to take a slower, methodical approach and see how the previous reductions shake out. No matter how empowered the governor feels from winning a second term, caution is in order.
