The action has shifted from general bills to revenue and appropriations bills, which move on separate tracks through the legislative process. Last week was the deadline to pass these money bills out of their original chamber.
Since there is no preceding committee deadline for revenue and appropriations bills, major legislation can often materialize quickly and get passed in the blink of an eye. That’s exactly what we saw with the massive tax reform bill that was unveiled last Tuesday and passed by the House on Wednesday.
The Mississippi Tax Freedom Act, HB 1439, which passed on a bipartisan 85-34 vote, would adopt the Governor’s proposal to phase out the state income tax, but it would offset the loss of revenue by immediately raising the state sales tax to 9.5% from 7%. The sales tax on groceries would be lowered in steps to 3.5%. It would take a minimum of 10 years for the income tax to phase out, with planned cuts being paused if revenue growth does not meet certain benchmarks.
Before outlining my concerns, I must give credit to the House leaders. After Gov. Reeves called for the full elimination of the state income tax in his budget, the House leaders crafted an alternative that makes up for most of the $1.7 billion/year that the income tax brings in. Their bill is a pragmatic effort geared at reforming the tax system, not the type of reckless “starve the beast” tax-slashing that brought Kansas and Louisiana to the brink of bankruptcy (and which Gov. Reeves is advocating for).
Ironically, in 2015 Speaker Gunn got the House to pass the exact income tax cut that Reeves is proposing without any new revenue sources. (Doubly ironic is the fact that then-Lieutenant Governor Reeves rejected the income tax elimination in order to get rid of the corporate franchise tax instead.) Six years later, he has essentially taken the same tax cut bill and combined it with the largest tax increase in the state’s history. That’s a pretty big improvement.
With that said, HB 1439 is still a bad and potentially dangerous bill. First, it will result in less money for underfunded public services. While the bill’s proponents claim that it will not decrease total revenue, they are relying on projected tax collections spurred by economic growth. The Laffer Curve theory that lower tax rates will increase tax revenue is what Paul Krugman calls a zombie idea that has been killed through empirical research yet lives on in political rhetoric. The bill does include a safeguard provision moored to reality: in years where revenue growth falls short of expectations, the tax cuts would be temporarily paused. Still, a vote for this bill makes the statement that tax cuts are more important than public services. The House leadership has quoted an estimated $1.9 billion in taxpayer savings over a decade — money that is badly needed for public education, public health, infrastructure, and other core functions of government.
The second concern is that it shifts the tax burden onto people with lower incomes. Mississippi’s income tax is very flat: 4% over the first $5,000 in taxable income and 5% on every dollar above $10,000. However, up to 40% of Mississippians do not make enough to pay the income tax. The first dollar taxed for a single parent with two kids after typical exemptions and deductions is $19,401. Most low-income Mississippians would see little to no benefit from the income tax cut. They would, however, bear the brunt of the 2.5% sales tax hike every time they go through the checkout line.
Reducing the sales tax on groceries will remove part of the sting, and its inclusion in this package shows that the House leaders have made equity a consideration, albeit a secondary (or tertiary) one. The bill’s principal author, Rep. Trey Lamar responded to a question from Democratic leader Robert Johnson on the House floor that he was open to adding an Earned Income Tax Credit to the bill, which could provide significant assistance to the working poor. Nevertheless, an EITC would increase the overall cost of the tax cuts, which exacerbates the concern about downstream budget cuts. The House bill was passed without an EITC, but there will be time for amendment before final passage.
The final concern is not about the House bill itself, but rather about the Governor, who was conspicuously not consulted by the House leaders and would likely veto the bill. The Governor seems committed to eliminating the income tax without a penny in tax increases — a plan that would eliminate one-third of state revenue and (further) devastate public services. The nonpartisan State Economist’s office just released an analysis of the Governor’s plan that predicts carnage: tens of thousands of layoffs, shrinking GDP, and increased outmigration. However, ideological allies of the Governor have released far rosier economic projections.
For now, the bill moves into the Senate, where it will sit off-stage for a week while floor action resumes on general bills. We’ll see if any closed-door compromises emerge in that time.