No clear path to erasing Mississippi income tax: Analysis

Mississippi Gov. Tate Reeves says he will ask legislators during the 2021 session to phase out the state personal income tax. The Republican should not count on it happening quickly — and even with his party controlling the House and Senate, it might not happen at all.

Reeves' predecessor as governor, Republican Phil Bryant, signed a 2016 law that phases out the 3% income tax bracket, starting in calendar year 2018 and ending in 2022. Reeves was lieutenant governor then, and he helped push the plan to reality.

Reeves now says Mississippi could be more competitive if it also erases the 4% and 5% brackets.

“Let’s eliminate the income tax, which is one huge speed bump to long-term economic growth and recovery,” Reeves said in November.

Republican House Speaker Philip Gunn said he's open to this discussion.

“We're trying to find ways to have a more solid and more fair tax structure,” Gunn said told reporters Dec. 7.

But, Republican Lt. Gov. Delbert Hosemann said during a news conference last week he won't rush into anything.

Hosemann said because of uncertainty caused by the coronavirus pandemic, legislators should see how the state economy fares in early 2021. He also said government needs to fund services that make the state stronger, and he wants to increase teacher pay.

“We’re not going to go through a process of eliminating the ability of people to get educated, just for a talking point," Hosemann said of the tax cut proposal.

Hosemann said eliminating the 4% income tax would cost about $250 million to $300 million and "we would have to make up somewhere." He said erasing the entire income tax would cost about $1.9 billion to $2 billion.

Without the income tax revenue, legislators could significantly cut state services or increase a different type of tax. Advocates say eliminating the income tax would create more economic activity, spurring revenue growth without requiring an increase in other taxes. Hosemann said the state would need a “tremendously profitable” year to make up the difference.

“We've not had that growth in Mississippi,” he said. “We've been in slow growth.”

The individual income tax is one of the largest sources of Mississippi tax collections.

During the fiscal year that ended June 30, the state collected about $5.8 billion from all types of state taxes, fees and other sources, including lawsuit settlements, according to the state Department of Finance and Administration. The biggest chunk of money, about $2.2 billion, came from sales taxes. The next-largest source was about $1.8 billion from individual income taxes.

The Mississippi Department of Revenue says the state does not charge individual income tax for the first $6,000 for a single person or the first $8,000 for the head of household — one person with at least one dependent. The exemption for a married couple is $12,000.

Mississippi charges no individual income tax on the first $2,000 of taxable income.​ It charges 3% on the next $3,000, 4% on the next $5,000 and 5% on all taxable income over $10,000.

Texas and Florida are on the short list of states without a personal income tax. Tennessee taxes interest from bonds and dividends from stock, but not other personal income. All three of those states have seen significant growth in recent years, while Mississippi has been losing population.

Of course, tax structure is not the only factor influencing which states thrive.

Among those pushing to phase out the income tax is Empower Mississippi, which advocates limited government.

"The more money Mississippi workers can keep in their pockets, the more they can invest in their families, their communities and their businesses," the group's president, Russ Latino, said in a Dec. 20 email. "Increased consumption in the economy drives new jobs and higher wages.”

Nancy Loome is executive director of The Parents' Campaign, an advocacy group for Mississippi public schools. She said Kansas experienced “catastrophe” when it dramatically reduced its income tax rate in 2012 and 2013.

"I say we take a pass on following the Kansas model," Loome said in a Dec. 17 email. “Let’s stick with a teacher pay raise, more pre-K and fully funded public schools — things that truly will make our state more livable.”

“Now, even if you phase that out over an eight-year period, it's still hundreds of millions of dollars a year,” Hosemann said.