Pushing income tax elimination uphill
In Greek mythology, Sisyphus was doomed to an eternity of pushing a boulder uphill. Modern proponents of state-based tax reform can relate. A failed experiment in Kansas has served as a cautionary tale for legislators considering changes to the tax code.
Only Kansas’ hill is a mirage—an obstacle of misperception, not of substance.
In 2012, the state began implementing aggressive income tax cuts. Between 2012 and the 2017 repeal of Kansas’ tax cuts, the state enjoyed record-high private sector employment, with a job-growth ranking among states that improved 10 spots after cutting taxes. The state also broke the record for new business start-ups in 2012, 2013, 2014, and again, in 2016.
Kansas reminds us of two things. First, the size of the government’s coffers and the wellbeing of a state’s people are not the same thing. Second, there are two sides of the fiscal coin. The year the state implemented cuts, it increased state spending by $432 million. Tax revenue continued to climb after the cuts, just not as quickly as legislators could spend.
House Bill 1439, passed out of the Mississippi House of Representatives, would eliminate Mississippi’s income tax gradually. It seeks to crest the Kansas hill by providing a path to maintain state revenue, with reasonable limits on spending growth. Unfortunately, thoughtful approaches are often complex approaches, not easily understood and easily misrepresented.
In 2022, HB 1439 would implement a substantial increase in the tax exemption available to Mississippi’s workers, such that an individual earning $47,700, or a married couple earning $95,400, would pay no state income taxes. This would mean thousands of dollars kept in the pockets of Mississippi workers to spend on their families, in their communities, and in growing their businesses.
Distinct from Kansas’ law, the bill would offset loss in income tax revenue with a shift toward consumption taxes and a broadening of the tax base. As revenue increased in subsequent years, HB 1439 would gradually increase the income tax exemption available until the state income tax was repealed in its entirety.
Complete elimination has been projected by year 10. The projection hinges, in large part, on another important feature of the legislation—a strong fiscal rule that restricts growth in government spending to 1.5 percent annually.
HB 1439 seeks to thread a narrow needle. On one hand, by implementing offsets and revenue requirements, it provides a rebuttal to critics who warn that tax changes would negatively impact the ability of government to provide for core functions. On the other, it implements limits on government spending that would be among the best in the country, while providing a long-term net tax reduction.
But is the juice worth the complicated squeeze? Answering that question requires some honesty. Mississippi’s tax revenue has climbed by nearly a third over the last decade. As a percentage of our economy, we have the 17th highest tax burden in the nation.
In the meantime, Mississippi households have the lowest median incomes in America, with a negative growth rate over the last decade when adjusted for inflation. Our economic and population growth have been equally stagnant, while we have the second lowest labor force participation rate in the country.
Eliminating the income tax is not a magic bullet, but it is an important step beyond the status quo.
Russ Latino is president of Empower Mississippi.