How might Mississippi lawmakers approach the elimination of the income tax?
If Mississippi became the 10th state to not charge an income tax, where would lawmakers turn for revenue? That is a question many have, and will continue, to ask.
Obviously, there is a lot we can learn from the states that already operate without income taxes, but there is a great multitude of differences between those states. Some have designed stable and sustainable tax structures. Others are almost wholly, and dangerously, reliant on specific industries.
While some income tax free states, such as Alaska, rely wholly on one industry for revenue, states like Tennessee, Florida and Texas have a balance of stable revenue streams that include relatively well-structured sales and property taxes.
The most viable path to eliminating the income tax is a shift toward consumption taxes. Taxing income is a tax on productivity, or what people add to the economy. Income taxes require a complex web of regulation, come with high administrative cost, and are more easily evaded. By contrast, taxing consumption is a tax on what people take out of the economy, which is preferably to taxes that create a drag on productivity. Consumption taxes, which include both sales taxes and use taxes, are the most broad-based, tend to be simple, both in form and administration, and are not as susceptible to evasion.
So, what would a shift to consumption taxes look like in Mississippi? Let’s start with a baseline understanding of what the current income and consumption tax environment is. In FY 2019, Mississippi collected $1.9 billion in individual income taxes after tax refunds and rebates were issued. An additional roughly $644 million in corporate income and franchise taxes were collected after rebates were issued. In that same year, Mississippi had $51.32 billion in reported gross sales. From these sales, Mississippi collected a total of $3.26 billion in sales tax, for an effective rate of 6.3 percent.
The downward deviation from the 7 percent most people think of as our sales tax comes from exemptions and lower rates in our tax code for certain sales. If Mississippi had collected 7 percent on the gross sales reported, sales tax revenue would increase to $3.59 billion. If Mississippi had collected 8 percent on the gross sales reported, sales tax revenue would increase to $4.11 billion. And if Mississippi had collected 9 percent on the gross sales reported, sales tax revenue would increase to $4.62 billion—a number nearly $1.5 billion above current collections.
Are your eyes bleeding yet? If not, let’s keep going.
All of these calculations assume a static environment, but neither economies nor the revenue they generate for states is static. Take for instances changes in Mississippi’s consumption and sales tax revenue. In FY 2010, the state reported $43 billion in gross sales and collected a total of $2.65 billion. In the ten years following, gross sales reported increased by nearly 20 percent and sales tax revenue increased by 23 percent, or roughly 2.3 percent a year on average.
So assume that Mississippi sales grew at the same rate of 20 percent over the next decade to roughly $62 billion in sales. At an effective sales tax rate of 7 percent, that would yield $4.34 billion in sales tax, at 8 percent, $4.96 billion, and at 9 percent, $5.58 billion.
This is before you ever consider other sources of revenue to the state. In FY 2010, the state collected approximately $1.65 billion in use taxes, excise taxes and an assortment of fees, all occurring outside of income tax, corporate income and franchise tax, and sales tax. By FY 2019, the state collected $1.96 billion from this broad assortment of taxes and fees, a roughly 19 percent increase. Assuming a similar increase over the next decade, the state can expect to collect roughly $2.35 billion.
So under an 8 percent sales tax rate, with no increase in use or excise taxes, the state could expect to take in $2.09 billion more than current levels in ten years. Adjustments to use or excise taxes could also be considered.
It’s not hard to see how the “gap” of gradually eliminated income taxes gets made up without drastic changes to our code. The whisper mill in the Capitol that sales taxes would have to be doubled simply isn’t credible.
But the calculations made above do not account for the added value to our economy of eliminating income taxes, because they assume that consumption patterns hold. The rise in disposable income and business capital to invest resulting from elimination of income taxes would have a net positive impact. The simple fact is that the more money people have, the more they spend, and the more they spend, the more the economy grows.
The figures above are also arguably too conservative because they assume population growth on track with an anemic current rate of 0.19 percent over the last decade. Even marginal increases in the population growth rate would have a profound impact on consumption patterns. As previously covered, the nine states without income taxes not only dramatically outpace Mississippi when it comes to state economic and population growth, but they easily wax national averages. Population growth in these states has averaged 13 percent over the last decade, more than double the national average and orders of magnitude above Mississippi.
This is why dynamic economic modeling could prove invaluable as lawmakers consider the elimination of the income tax, and why the burden of “making up” losses is likely not as onerous as detractors would have people believe.
Note on Data Sources: All figures cited above were pulled from the FY 2010 Annual Department of Revenue Report and the FY 2019 Annual Department of Revenue Report. Calculations were performed by author to demonstrate how changes in a static environment would impact revenue streams, and are not intended to be conclusive or take the place of more rigorous dynamic economic modeling that should be considered by policymakers.