Eliminating the State Income Tax Would Wreak Havoc on Mississippi

https://itep.org/eliminating-the-state-income-tax-would-wreak-havoc-on-mississippi/

 

August 25, 2021

Mississippi lawmakers are holding two days of hearings this week on eliminating or cutting the individual income tax after similar proposals failed this Spring. It’s difficult to understand the logic underpinning Mississippi’s current efforts to explore eliminating the individual income tax when history has proven, time and time again, that this policy harms state economies, dismantles basic public services, and exacerbates tax inequities. And even states that can adequately rely on other sources of revenue aside from income taxes often have highly inequitable tax systems since the income tax is the fairest, most progressive form of taxation. The idea that Mississippi could eliminate its income tax without making devastating cuts to the state budget or shifting tax responsibility onto low-income residents is pure fantasy.

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Speaker Gunn has held up Texas and Tennessee as models for Mississippi even though states without income taxes are among the most inequitable in the nation, coming in at #2 (Texas), #3 (Florida), and (#6) Tennessee in ITEP’s most recent Who Pays? report. For example, Texas is extremely low-tax for the wealthy since it has no personal income tax, no corporate income tax, and no estate tax; the top 1 percent of earners pay just 3.1 percent of their income in state and local tax while the poorest 20 percent pay 13 percent. Similarly, Tennessee may have eliminated its income tax, but it is far from being a “low-tax state” for the poor. As a share of personal income, the poorest 20 percent of residents pay significantly more of their income in state and local taxes than any other group in the state. Their heavy reliance on sales and excise taxes pushes the states’ impoverished residents deeper into poverty. These inequities also have dramatic consequences for racial equity, as Hispanic and Black families are taxed at higher average rates than higher-income white residents.

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Mississippi’s tax code is already regressive due to its reliance on sales taxes, lack of estate tax, and lack of refundable income tax credits. As it stands, Black and Hispanic families have among the lowest average incomes but pay the highest effective tax rates in the state. Black households pay, on average, 30 percent more of their income on sales and excise taxes than white households. Since the personal income tax structure is virtually flat, it is far from being as progressive as it could be; however, its sheer existence offsets some of the system’s regressivity. Eliminating the only marginally progressive aspect of the tax system would place an even higher tax responsibility on low-income residents who are disproportionately Black and Hispanic. Even if Mississippi were to reduce the grocery tax rate, eliminating the personal income tax and increasing the sales tax rate to 9.5 percent on most items would reduce incomes for the poorest 20 percent of earners by $200 while saving the richest 1 percent over $28,000 a year. Nixing income taxes would primarily be a boon for Mississippi’s richest residents, the top 1 percent of whom have already saved over $35,000 in 2020 alone due to Tax Cuts and Jobs Act (TCJA) provisions.

The policy change would also hurt seniors on fixed incomes. Since Mississippi exempts all retirement income from income taxes, many seniors do not currently pay income taxes but they would certainly pay higher sales taxes on basic goods. Creating a system more akin to Texas or Tennessee would merely enrich powerful interests at the expense of lower-income residents. [Which is of course the aim. ]

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