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Posted January 2021Appreciably hot on the heels of Mississippi’s largest tax cut, passed in 2016, Governor Tate Reeves has now proposed the complete phase out of the individual income tax in his budget proposal for FY2022. The proposal builds on the 2016 legislation by phasing out the top income tax rate of 5% by 2030, revenue permitting.
Mississippi’s income tax was originally passed in 1912. It was, and still is, a graduated income tax, although the current brackets are laughable. The first $2,000 of income is not taxed. The next $3,000 of income is taxed at 3%. The next $5,000 of income is taxed at 4%, while any remaining income over $10,000 is taxed at 5%. Although the brackets produced a graduated result in 1912, today they only serve to add an additional $290 of income tax liability for taxpayers earning over $10,000 in a calendar year.2
Any discussion of the Governor’s FY2022 tax proposals must necessarily begin with a description of the 2016 legislation, the “Taxpayer Pay Raise Act.” Relevant to our discussion, that legislation eliminated the 3% tax bracket in stages. In 2020, the 3% bracket begins at $3,000 of income. Then, in 2021, the 3% bracket begins at $4,000. Finally, in 2022, the 3% bracket will be eliminated completely.3 The net effect of this phase out is a tax savings for the individual taxpayer that amounts to (ahem) $60 per year, beginning in 2022.
The tax brackets have clearly outlived their usefulness, and it has been suggested that the state simply switch to a flat 5% individual income tax. The Governor went one step further, however, and proposed the elimination of the 5% bracket as well as all the others. He did not offer a revenue offset for the lost income, arguing instead that the reduced income would offset itself by increased business activity in the state. How much lost income, you may ask? Well, in FY 2019, the State of Mississippi collected approximately $1.9 billion in revenue from the individual income tax. This made up about 43 percent of the state’s total tax collection, far more than any other tax category.4
Clearly the Governor cannot repeal the income tax by executive fiat, and such was not the intent of his announcement. He does enjoy broad support in the current legislature, though, so the idea that this proposal will become law is very plausible.
Assuming the proposal is put into effect, the elephant in the room will be replacement of the $1.9 billion in lost revenue. The previous 2016 legislation has ultimately decreased, not increased, state revenue.5 It is reasonable to assume that the much more drastic measure of eliminating individual income tax will result in a significant loss of revenue that may never be replaced. The speculation required to guesstimate the total lost income that will result is beyond the scope of this article.
That being said, this author is of the opinion that, if the Mississippi income tax is repealed, the legislature will eventually seek to at least partially offset the revenue loss by means of increasing the sales tax rate. Other states, such as Tennessee and Florida, do not have an income tax, but have higher sales tax rates that produce revenue similar to what would be earned by an income tax. The sales tax is ultimately a consumption tax, so it remains to be seen how an increased sales tax will affect buying habits in Mississippi. The state is able to far more effectively tax internet sales than ever before, and thus the sales tax is almost inescapable. An increased sales tax rate in Mississippi may be the future.
