The Mississippi legislature has recently begun discussions about changing the mix of taxes that generate state revenue to include elimination of income taxes. Economic reasoning and analysis should be a primary factor in this discussion, but basic economic principles and knowledge are also important components in this important policy issue.
Two major considerations are risk and equity. As with any entity (business, person, government, etc.), revenues must exceed or equal costs to ensure a balanced budget. Of course, debt may be used to supplement revenues but the sustainability of relying on debt to balance an annual budget shifts responsibility to future revenue streams. The federal government in the United States routinely uses debt to balance its annual budgets but it has an advantage over almost all other entities in that it can print money and borrow large amounts at low interest rates. States, like Mississippi, do not have these alternatives (especially carrying deficits over multiple years) and must balance their annual budgets using an array of revenue sources that include income, sales, property, corporate, other taxes, and fees. Risk implies an outcome different from that expected and usually a less desirable outcome. In the financial world, one way to mitigate risk is to spread it out. That is, diversify. If revenues are the focus, a diversified portfolio is recommended to reduce risk. Which brings us back to tax policy. The more diversified the sources of revenue, the less risky is the revenue stream. Thus, if you delete a major stream of revenue (income tax), you increase the risk of the overall revenue stream. In the Mississippi case, shifting the burden to sales taxes is even riskier since sales taxes are subject to business cycles which include recessions.
The other consideration is equity, which is defined as being fair and impartial. Equity, with respect to tax policy, often centers on regressive and progressive approaches. A regressive tax is one for which lower income persons pay a higher fraction of their income, while higher income persons pay a smaller fraction of their income. Sales taxes are considered a regressive tax. In addition, Mississippi is one of only three states (Alabama and Idaho) that tax food, a basic human need, at the full sales tax rate.
A progressive tax is one which higher income persons pay a larger fraction of their income than do lower income persons. Income taxes are considered a progressive tax. There are nine states with no income taxes; Alaska, Tennessee, Wyoming, Texas, South Dakota, New Hampshire, Washington, Florida, and Nevada. Most offset the decreased revenue with higher sales and sin (alcohol, gambling, and cigarette) taxes and/or mineral (oil and gas) taxes.
An examination of the recent Kansas tax policy change offers a sobering picture to lowering income taxes, albeit not an entirely analogous comparison to Mississippi’s situation. Kansas did not increase sales taxes to make up the difference in annual revenue which led to mammoth deficits and cuts to spending. After a trial run, the Kansas Legislature repealed the income tax reduction, along with other revenue decreasing initiatives.
So what is the lesson here? Although state tax policy is always a contentious issue, we should not forget that Mississippi incurred the largest ever tax cut in 2017 when the “Taxpayer Pay Raise Act” was enacted, and corporate taxes were reduced to attract industry to the state while further reducing state revenues. We are once again being told the same story about eliminating the income tax, except this time we will attract people who want to avoid income taxes. All Mississippi residents should know this. If you want to increase the risk associated with state revenue and become an even more regressive tax state, support this initiative. Otherwise, do not.
Steve Turner is Director Emeritus of the Southern Rural Development Center at Mississippi State University.
