As the Mississippi Legislature hurtles towards passage of an income tax reduction/elimination, its citizens should be aware of the economic consequences of this misguided decision. A major principle of basic economics is that revenues must equal expenses for a balanced budget as required by state law. Another common understanding among economists is that revenues are more difficult to forecast than expenses. In addition, revenues are quite cyclical and can fluctuate dramatically based on the business cycle of expansion and recession. Today, the state of Mississippi is experiencing a flush in revenues due to a recovering economy and large infusion of federal dollars. Legislative leaders and the Governor repeatedly have stated this is an opportune time to lower a progressive tax (income) and increase a regressive tax (sales). From an equity perspective, this shifts even more of the fiscal obligation for public services to retired and lower income Mississippi citizens. Retirees should be concerned because Mississippi taxes little to no retirement income so their state income tax is already zero. But the current legislation will increase sales tax on every good and service purchased except food, where a decrease will occur (7% to 4 or 5%). The thought is that the substantial loss in state revenue from the income tax decrease will be replaced by the additional revenue from the sales tax increase. This is a highly suspicious hypothesis and assumes a growing Mississippi economy, ignoring the business cycle.
In a previous column (A Primer on Taxes and Public Policy, Northside Sun, 09/26/2021), a discussion of state tax policy centered on the risk and equity of economic decisions. A telling conclusion was that reduction/elimination of the state income tax and the associated increase in sales taxes would make the state even more regressive in its tax collection and increase the risk associated with state revenue. The business community knows this because they operate in an economic environment where uncertain revenue streams are the norm and to eliminate or decrease a third of your annual revenue would be suicidal. Furthermore, ignoring basic economics to score political leverage is a questionable long-term strategy. Thus, the prediction.
Many citizens in Mississippi will regret this decision in 2022 to further shift the tax burden from the working population to retirees and the poor. Corporations, many out of state, have already enjoyed a large tax cut in 2017 (“Taxpayer Pay Raise Act”) which reduced state revenue. The day is coming when the continued reduction in state revenues will come home to roost. State agencies, public education, and state employees will face years of stagnant or lower allocations while Mississippi continues to trail the nation in livability metrics (health, education, etc.)
On the other hand, a smart economic decision to expand Medicaid and infuse the state with billions of Federal dollars is no nearer than it was a decade ago. The result of that Legislative and Executive decision has put our rural health system at a distinct disadvantage relative to the 38 states where expansion has occurred. This continues to be a prime example where economics takes a back seat to politics and the resulting ramifications contribute to a declining population.
Steve Turner is Director Emeritus of the Southern Rural Development Center at Mississippi State University.
