There’s a better than even chance that a tax cut is going to come out of the Mississippi Legislature this year.
House Speaker Philip Gunn has made a complicated tax swap (and overall cut) his No. 1 push for the past two years — what some believe is his launching pad for a run for governor in 2023.
The incumbent he could challenge, Tate Reeves, has always advocated elimination of the personal income tax.
And Lt. Gov. Delbert Hosemann — the most cautious about tax cuts of the Republican trio — is working on his own plan.
There’s money to do something, thanks largely to the huge infusion the past two years of federal coronavirus relief funds, which have jacked up consumer spending and filled the state’s coffers with way more revenue than had been anticipated.
The question at this point, though, is not whose plan would do the most good. It’s whose would do the least long-term harm.
Since Hosemann hasn’t unveiled his idea yet, there’s no way to judge it.
Of the remaining two, Tate Reeves wins the award for simplicity. After championing, while he was lieutenant governor, a reduction in the income tax, what could be easier than eliminating the tax entirely and see what happens?
With no offsets, though, it’s bound to be a fiscal disaster. The current surpluses may hide the impact until Reeves is no longer in office, but the ultimate result in eliminating a source that accounts for one-third of state government revenue will be raising taxes somewhere else.
As I’ve previously written, all one has to do is look at the seven other comparable states without a personal income tax to see what’s probable. The seven have either higher sales taxes than Mississippi, higher property taxes or both. Some have state and local property taxes. (Mississippi only taxes property at the local level). Some have state and local general sales taxes. (Mississippi only has a state general sales tax.)
At least Gunn’s plan partially acknowledges that when one tax goes down, another has to come up — either that or government services and government employee numbers have to be substantially sliced.
The House speaker wants to phase out the personal income tax, reduce the grocery sales tax by almost half and cut the cost of car tags by more than a third. In exchange he would raise the state sales tax on most everything but groceries.
Still the swap would come up significantly short of paying for itself. In the first year, according to Legislative Budget Office estimates, the pandemic-fueled surpluses would cover about a fourth of the cost of the tax cuts. The next year, the state would be counting on the surpluses to pay for half of the cost.
But what happens when those surpluses peter out, which is as inevitable as the ups and downs of the economy? How does Gunn expect the state to make up the difference? His plan doesn’t say.
He’s counting on true growth in state revenue — not inflationary growth — to pay for higher teacher salaries and other increases in recurring expenses. And although his plan calls for pausing further income tax reductions if that doesn’t happen, it makes no provision for how to afford what has already been done.
Gunn’s arguably worst idea is one the House speaker threw into the mix this year: letting the state subsidize the cost of local car tags. He would cut them by 35% (an amended version in the House actually upped the reduction to 50%) but then send state money back to local governments to make up for the cuts.
Because car tags are inordinately high in many parts of Mississippi, including here in Leflore County, this idea is going to be very popular. But it’s also foolish.
The reason car tags are so high is because it’s one of only a couple of ways that county governments and public school districts can raise the money they need to operate. They can tax houses, businesses and land, and they can tax automobiles. But there’s not much else left.
If the state starts subsidizing the cost of car tags, it won’t be long before the tax rate on automobiles goes up. There will be less restraint on local governments to hold down the cost when the state is paying for a large portion of the tags.
It’s the same phenomenon that already happens with college tuition. The more the government provides in tuition assistance, the higher tuition rises. College administrators feel freer to raise tuition when it’s not all coming out of their students’ or their families’ pockets.
The current boon at the state treasury is a temporary condition. Tax cuts are a permanent response to it.
Not recognizing this is like a worker using a Christmas bonus to take out a larger mortgage. It doesn’t work for long.
Tim Kalich is editor and publisher of The Greenwood Commonwealth.