Tax Needs vs. Tax Cuts Bedevils Legislators

With legislators looking at taxes, some of us should be worried, some thrilled.

The need to study taxes results from weakening tax revenues along with a sluggish economy, and also because the largest tax cut in state history is pending.

Legislative leaders know they need a consistent, dependable tax base to fund state government. Republican legislators, now a dominant majority, know their voter base hates taxes and wants tax cuts. Where is the balance point – is there one – between these two points of view?

And, then, there is the real question. Who will pay?

So, who’s paying now?

The Institute on Taxation and Policy publishes tax information for all 50 states. As you might expect for Mississippi, the data shows sales taxes are a heavier burden on low income individuals while income taxes are a heavier burden on higher income individuals. Interestingly, when added together, the burdens pretty much balance out. The average sales plus income tax burden on both the lowest and the highest income quintiles was five percent of income in 2015. For the middle three quintiles, it was six percent.

Sales taxes and personal income taxes are the two biggest revenue sources for the state’s general fund at $2.0 billion and $1.74 billion respectively.

Looks like the tandem of sales taxes and personal income taxes is pretty flat and balanced for taxpayers.

Some proposals would upset this.

For example, Lt. Gov. Tate Reeves said his preference would be to phase out personal income taxes and replace them with consumer taxes and user fees. (The sales tax is our major consumer tax.) Reeves’ proposal would shift much more of the tax burden to low income individuals and much less to higher income individuals. The bottom three quintiles already spend almost five percent of income on sales taxes while the top quintile spends half that. So is Reeves’ proposal about tax equity or something else?

Unless something changes, business taxes will drop substantially. Over the past four years, legislators approved $350 million in tax benefits for businesses. This year they added another $270 million. While these benefits phase in over multiple years, they represent about ten percent of total state general fund revenues based on current figures. That’s significant.

Also passed this year is phased-in elimination of the three percent personal income tax bracket at a cost of $145 million.

Quite frankly, it appears that to keep the tax cuts already promised to businesses and individuals, legislators will have to substantially cut state spending and/or find new sources of revenue.

With regard to new sources, Alabama is looking at a state lottery. Mississippi already has constitutional authority for a lottery, but powerful casino interests keep it off the table.

Most states, and the IRS, tax retirement income (with some exclusions), but not Mississippi. Thus, in addition to pensions, any income that passes through an IRA, 401(k) or other tax deferral vehicle, forever avoids Mississippi income taxes (another plus for high income individuals).

Whatever, our legislators’ studies won’t reveal any easy answers.

 

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