The Mississippi Legislature is considering three major tax proposals to lower or even eliminate the state’s income tax while reforming business taxes such as the state’s franchise tax. Each proposal would keep tax dollars in the pockets of Mississippi businesses and individuals and would represent a substantial improvement in the state’s tax system.
Gov. Phil Bryant introduced the first major tax proposal last year in his budget proposal. Bryant’s proposal piggybacks on the current federal Earned Income Tax Credit: Married people with three or more children making up to $52,427, and single childless taxpayers making less than $14,590, could receive the tax credit under the proposal. The income tax cuts would go into effect only in years when state revenue grows by at least 3 percent. Bryant estimates the tax reduction would lower the tax burden for more than 300,000 households and save taxpayers approximately $78.7 million.
Lt. Governor Tate Reeves has proposed the Taxpayer Pay Raise Act, which would eliminate the 3 percent tax bracket on individual income. Today Mississippians pay a 3 percent income tax on their first $5,000 of income, 4 percent on the next $5,000, and 5 percent on income over $10,000. Many economists consider income taxes to be the most destructive tax, stunting economic growth by taking dollars out of the hands of consumers and businesses.
Reeves’ plan also would remove the investment penalty, or franchise tax, on businesses’ property and capital. Mississippi is one of only 18 states with a franchise tax and has the sixth-highest such levy in the nation. The tax is imposed at a rate of $2.50 per $1,000 of capital or property, whichever is greater, with no limit on maximum payment. Eliminating the tax would remove a disincentive for in-state investments, which the franchise tax penalizes.
Reeves’ tax plan is estimated to reduce the overall tax burden of Mississippians by $400 million. A Mississippi State University study concludes Reeves’ plan could grow the state’s GDP by $282 million and add 3,514 jobs within 10 years. The state currently ranks 18th on the nonpartisan Tax Foundation’s Business Tax Climate Index.
The third proposal, offered by House Speaker Phillip Gunn, would completely phase out the state income tax by 2030, resulting in a $1.38 billion individual income tax cut. The plan would begin by phasing out the state’s 3 percent tax bracket by 2019, similar to Reeves’ plan, and then also phase out the 4 percent bracket by 2022 and the 5 percent bracket by 2030. Like the Bryant proposal, Reeves’ plan includes a 3 percent revenue-increase trigger.
Lowering personal and corporate income taxes can dramatically improve a state’s economy while generating new jobs. Legislators should support efforts to eliminate these taxes. Reeves’ proposal addressing franchise taxes would improve the state’s competitiveness by eliminating a double tax on business activity. Mississippi needs to reduce its overall tax burden, and each of these plans is a step in the right direction.
The following articles examine tax reform from multiple perspectives.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.
Tate Reeves Announces Proposed $400 Million Tax Relief Plan for Mississippians
http://blog.gulflive.com/mississippi-press-news/2015/02/tate_reeves_announces_proposed.html
Warren Kulo of GulfLive.com discusses Mississippi Lt. Gov. Tate Reeves’ plan to provide $400 million in tax relief to Mississippians, which Reeves says would encourage economic development by small businesses.
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
Institute Brief—No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
The Public Interest Institute examines how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”
State Income Taxes and Economic Growth
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. They used regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004, and they found higher marginal tax rates significantly suppress economic growth.
Rebuilding Mississippi’s Business Tax Climate
http://taxfoundation.org/article/rebuilding-mississippis-business-tax-climate
Jonathan Williams and Chris Atkins of the Tax Foundation examine Mississippi’s tax system and recommend several areas for improvement: “Mississippi can rebuild itself by attracting new capital and providing incentives for enterprising individuals to locate within the borders of the Magnolia state.”
Research & Commentary: Mississippi Franchise Tax Repeal
https://heartland.org/policy-documents/research-commentary-mississippi-franchise-tax-repeal
In this Research & Commentary, Matthew Glans examines franchise taxes and similar taxes, documenting reform efforts in states such as Mississippi. Franchise taxes, like all corporate taxes, are not really paid by the corporation but by customers (through increased product and service prices), employees (through lower wages), and others. Lowering or eliminating franchise taxes improves a state’s competitiveness by removing a double tax on business activity.
Will Mississippi Eliminate Its Antiquated Franchise Tax?
http://taxfoundation.org/blog/will-mississippi-eliminate-its-antiquated-franchise-tax
Jared Walczak of the Tax Foundation argues Mississippi’s continued reliance on capital stock taxes (such as the franchise tax) has held back the state’s economy: “Mississippi has an opportunity to change that, and neighboring states would do well to watch closely.”
The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
Examining the historical results of income tax cuts, Daniel Mitchell of The Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
Nothing the Matter with Kansas’ Tax Policy
http://www.heritage.org/research/commentary/2014/7/nothing-the-matter-with-kansas-tax-policy
Stephen Moore of The Heritage Foundation responds to Paul Krugman’s criticism of Kansas’s tax reforms: “As for Kansas, the tax cut has been in effect a mere 18 months—not a lot of time to measure the impact. We will see over the next few years whether growth is revived in a state that people have been fleeing for the past decade. Tax revenues are down, but they are in most states because of reductions in capital gains receipts from 2013.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s Director of Government Relations, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
