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Mississippi considering ending its personal income tax

Republicans in the Mississippi legislature are again pushing for their state to end its personal income tax and replace some of the revenue that would be lost with a higher sales tax. This is not a Magnolia State receipt. Mississippi's sales tax is 7 percent, with the tax change plan calling for it to go to 9.25 percent.

I get it. People hate paying income taxes, even when they know the money pays for things that are important to their communities.

But things gotta be paid for somehow.

That's the question facing Mississippi lawmakers and residents as the state once again debates joining the no-personal-income-tax club.

Tax change hearing: This week, members of the Mississippi legislature held hearings on repealing the state's income tax and replacing that lost revenue.

The Mississippi Department of Revenue estimates that the current income tax brings in around $2 billion a year. The leading proposal to fill that budget hole calls for a 2.5 tax increase in the state's current 7 percent sales tax, hiking it to 9.5 percent on most items.

News reports indicate that most of those who testified were from conservative, anti-tax groups. That's led some legislative prognosticators to opine that the question isn't whether the state's tax laws will be changed, but how they will be changed.

Tax trade-offs: The effort to end Mississippi's income tax is being led by the legislature's Republican Speaker of the House Philip Gunn.

The loss in personal income tax revenue would not be felt all at once. Gunn's plan would phase it out based on earners' wage levels. The first to be relieved of taxes would be single filers earning $40,000 or less per year and married couples making $80,000 or less.

To offset some of the effects of the corresponding proposed sales tax hike, Gunn would cut Mississippi's grocery tax from the regular 7 percent rate to 3.5 percent.

A similar income tax elimination plan passed the Mississippi House last session, but failed in the Senate.

No-tax opponents' arguments: Those opposed to the plan, i.e., Democrats in the state legislature, say that the shifting from reliance on income taxes to more sales tax money ultimately would hurt working class and poorer families.

Those earners already pay a greater share of their income in taxes on goods they purchase compared to wealthier residents. The shift to sales tax would exacerbate this situation.

Instead, say opponents of the tax changes, if the income tax is eliminated, the loss of income should be replaced by expanding corporate taxes, implementing a tax on retirement income, and/or implementing an estate tax.

However, with Republicans in charge of the Mississippi legislature and governor's mansion, those tax increases are nigh impossible.

But expect the debate to continue until next year, when Magnolia State lawmakers return to official session in January and can begin holding actual votes on the tax proposals.

Economic pitfalls of Mississippi's plan: And since the state's lawmakers didn't provide as much time for those opposed to the tax elimination, let me offer some data from that side that they can read in the intervening months.

The Institute on Taxation and Economic Policy (ITEP) sets out reasons why, in a recent blog post by the nonpartisan Washington, D.C.-based think tank, the elimination of the state's income tax would wreak havoc on Mississippi.

One point made by proponents of ending Mississippi's state income tax is that growth in no-tax states has outpaced that of many others across the country.

But, says ITEP, Magnolia State officials should not try to compare their state directly to other no-income-tax jurisdictions. Every state's economy is different. Two notable examples, Texas and Florida, have other resources to offset their lack of individual income taxes.

Here in my native Lone Star State, oil and natural gas production severance taxes collectively account for 7.2 percent of Texas' revenues. In Mississippi, notes ITEP, oil and gas severance tax accounts for less than half a percent.

As for Florida, the Sunshine State is chock full of theme parks and miles and miles of coastal beaches that attract tourist dollars to hotels and restaurants, letting out of state visitors help boost its economy (at least in the COVID Before Times) with their taxed expenditures. Mississippi sales tax increases, however, would predominantly be borne by its residents.

Other no-income tax states: As just noted, Texas and Florida are two of the nine no-tax states. Long-time readers of the ol' blog already know the full list of those that don't collect any personal income tax. I've blogged about it often.

But if you're a new reader (thanks!) or dumped that tax data because your brain needed the space (a move I frequently make), here they are, alphabetically:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington, and
  • Wyoming.

And now a couple of no-income-tax caveats in connection with the above list.

2021 is Tennessee's first year in the totally no-tax category. Previously, its Hall Tax was assessed on investment income.

And speaking of that income categories and taxes, while New Hampshire doesn't tax earned wages, it does collect tax on investment earnings.

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