Many eyes watching personal income tax proposal

One of the most watched issues by Mississippians when the Legislature con­venes on Jan. 4 will be Gov. Tate Reeves’ proposal to eliminate the personal in­come tax.

But Mississippians will not be the only people watch­ing. Also watching will be some prominent New York­ers who can impact the state’s ability to issue and pay for debt to fund long-term projects.

“Mississippi’s general fund relies on a diverse set of revenues… There ap­pears to be interest, how­ever, in making a significant change in the state tax structure with both the gov­ernor and legislators pro­posing various means of reducing or eliminating the PIT,” Fitch, one of the three major credit rating agen­cies, said in an analysis of Mississippi’s financial condi­tion. “Fitch will continue to monitor developments re­lated to the proposed changes. A structure that results in a slower growth, a more volatile revenue sys­tem or that results in a rev­enue gap relative to spending needs would be a negative credit considera­tion.”

Fitch’s analysis is impor­tant because if the agency gives a state a bad credit rating, it will become more difficult for the state to issue bonds.

Mississippi’s general fund tax collections for the last fiscal year were $6.7 billion. If the state’s personal in­come tax had been elimi­nated, as Reeves wants to do within the next five years, the total would be $4.5 billion.

Take away the revenue from the tax on personal in­come and the state would have roughly the same amount of revenue it was collecting before 2010.

In essence, without the personal income tax, Mis­sissippi’s political leadership would be trying to fund the needs of the state in health care, education and in other areas at today’s costs with the revenue from more than a decade ago.

Inflation over time nor­mally drives up the costs of goods, wages and, yes, the revenue collected by gov­ernmental entities and pri­vate businesses. If a tax is phased out over time as Reeves wants to do, overall revenue collections may not ever decline year over year, but that does not factor in the cost of inflation. With the phase-out of the tax, the state’s ability to keep up with the rising costs of goods and services is weak­ened.

Reeves maintains that the income tax phase-out will spur economic growth, re­sulting in an increase in rev­enue collections.

“Eliminating the individual income tax will further help us fuel Mississippi’s eco­nomic engine for the next 100 years,” the governor said in a narrative setting his goals for the 2022 session.

But State Economist Corey Miller said research indicates “changes to state taxes in Mississippi are likely to have marginal ef­fects on economic growth, employment, and popula­tion.” In a report to legisla­tors, Miller added that studies have been inconclu­sive, to a certain degree, on how tax policy relates to economic growth.

But in general in a small state like Mississippi, na­tional economic conditions play a larger factor than does tax policy. Miller said various studies “suggest state spending on elemen­tary education, secondary education, and higher edu­cation as well as infrastruc­ture can promote economic growth over the long term.”

But Reeves contends state revenue is booming and that some of the sur­plus should be used to begin the phase out of the income tax.

True revenue is growing at perhaps a record pace.

In the 1990s, revenue also was growing at a record pace thanks primarily to the introduction of casino gam­bling in Mississippi. But by the end of the decade that revenue growth was slow­ing, soon followed by a na­tional recession.

That recession centered around the first large-scale exodus of low paying man­ufacturing jobs from Amer­ica to foreign countries. Mississippi was hit particu­larly hard because it had more of those jobs per capita than any other state.

The result was, for the first time in the modern era, that the state collected less rev­enue one year than the pre­vious year, forcing legislators to make signifi­cant budget cuts.

Tax collections did not re­ally rebound until Hurricane Katrina pummeled the Gulf Coast in 2005, resulting in a massive influx of federal funds, insurance payments and a large-scale rebuilding effort that led to increased tax collections for the state.

The latest growth, many economists say, is being spurred not just in Missis­sippi but nationwide by COVID-19 and the massive influx of federal funds states have received be­cause of the pandemic.

Reeves believes that be­cause of that growth, now is the appropriate time to enact the largest tax cut in the state’s history.

Eyes both in Mississippi and in other key parts of the country will be watching to see if legislators agree.