This article is the first in a three-part series that will examine Mississippi’s largest single tax cut in history, the effects of which will be seen in the upcoming fiscal year.
Interest groups representing multi-million dollar corporations had wanted a tax cut for more than a decade.
Lobbyists pushed for one over expensive dinners and in private meetings with legislators for years.
A conservative constituent group organized mass phone calls to lawmakers, pleading with them to consider a tax cut.
Ultimately the matter came down to a dramatic, two-and-a-half hour Senate debate on the evening of April 18, 2016.
With 36 yea votes – two more than the required two-thirds majority – the largest single tax cut in Mississippi history, dubbed the “Taxpayer Pay Raise Act,” was sent to Gov. Phil Bryant for his signature into law.
And in the fiscal year that began on Saturday, Mississippi will first see the impact of the cut, for better or for worse.
By the end of its 10-year rollout, the tax cut will do three things:
• Eliminate the corporate franchise tax
• Eliminate the 3 percent individual income and corporate income tax brackets
• Allow self-employed Mississippians to exempt a portion of their federal self employment tax on their state tax filings.
In plain terms, Mississippians will pay $150 a year less in state income taxes on the first $5,000 of taxable income when that portion of the cut is fully phased in by 2022. Self-employed individuals will have clearance to deduct half of their federal self-employment taxes by 2019.
Corporations currently pay a franchise tax, which is a tax for having a capital investment in the state, at a rate of $2.50 for every $1,000 in assets. Big businesses, starting Jan. 1, will pay $0.25 less per $1,000 in assets each year for 10 years until that rate hit zero in 2028.
While those Mississippians will begin saving money during tax refund season, the state will begin losing tax revenue, which is the largest source of funding for basic services provided by the state, such as public education, infrastructure maintenance and construction, state employee pensions and benefits, Medicaid and Medicare.
Mississippi is projected to lose just $18 million from the new tax policy in the upcoming fiscal year, according to Department of Revenue and Legislative Budget Office figures.
When the corporate income and corporate franchise phase-outs begin starting Jan. 1, Mississippi stands to lose $46.5 million in fiscal year 2019. By fiscal year 2022, the tax cuts are projected to reduce state revenue by $70.8 million each fiscal year.
By fiscal year 2028, the scheduled completion of the phase-out, the state will be losing $415 million per year in revenue from the tax cuts.
Legislative leaders are banking on the idea that money returned to the purses of corporations and individuals will be re-invested in the state by way of expanded capital projects and increased production and purchase of goods and services.
Leaders pitched the franchise cut as a way to make the state more competitive when trying to attract new business to the state. Just 16 states still have the franchise tax, including all four of Mississippi’s neighbors.
“This is a literal tax on investment and capital formation,” said Nicole Kaeding, economist at the Tax Foundation and adviser of legislative leadership. “By eliminating this tax, you are not penalizing firms that invest more in the state of Mississippi. Most states have eliminated this tax because they do not want to penalize investment in their state.”
But not everyone is sold on the idea. Several Democrats, who virtually voted en bloc against the cut in both houses in 2016, have taken many opportunities to question eliminating a substantial revenue source, particularly when lagging revenues have forced five mid-year budget cuts to most state agencies in two years.
In fiscal year 2016, Mississippi collected $278.5 million in franchise taxes. In 2015, the state collected $260.6 million, and in 2014, $242 million.
Three separate efforts this year by Democrats to delay the tax cut’s implementation by a year failed without gaining traction. One Republican, Rep. Becky Currie, R-Brookhaven, publicly supported the idea, and several others buzzed about it.
Economists have varying takes on the policy. Kaeding supports the policy and believes it will generate economic growth in the state.
State Economist Darrin Webb, who runs the University Research Center with “unbiased, research-driven” mission, told Mississippi Today he does not believe the tax cut alone will pay for itself.
“I don’t think (the tax cut) will generate enough activity to fill the hole it will leave in revenue,” Webb said. “Other states didn’t have it and it may help (bring some business to Mississippi), but it’ll take an awful lot of companies coming here from other states to get close. It’s not going to create a boon for the economy.”
Six economists, some favoring the cut and some opposing it, interviewed by Mississippi Today agree: Cuts with the size and scope as the Taxpayer Pay Raise Act require a huge uptick in business activity coupled with state leaders devoted to cutting spending or finding other ways to plug budget holes the tax cut will leave.
Mississippi leaders have actively campaigned on the latter principle. Lt. Gov. Tate Reeves, who spearheaded this tax cut and 50 others since he took office in 2012, preaches the trickle-down approach: Corporations will take the money that they would previously have spent on state taxes and invest in capital expansions or new projects that would bolster the economy.
Companies might take the saved money and produce more goods and services, he says. Employees of these companies could receive raises or stronger benefits, which would then allow them to spend more money in Mississippi’s economy on other goods and services, Reeves says.
The Mississippi Manufacturing Association – one of the most powerful groups pushing the reform – partnered with the National Strategic Planning & Analysis Research Center at Mississippi State University in 2015 to study the potential impact of the law.
The findings, which were widely distributed to and cited by lawmakers during the bill’s debate, showed a $288 million personal income increase, a $282 million state GDP increase, and 3,514 new jobs created, all by 2025. According to lawmakers interviewed during the 2016 session and within the last month for this article, those were the only figures provided when the House and Senate were considering the cut.
“We worked for more than a decade on getting the franchise tax eliminated,” said Jay Moon, president of the Mississippi Manufacturing Association. “When you look out and see over half the states don’t have this tax, and others have eliminated, you look at it and say that we have to put ourselves in a position to be competitive. I don’t think there’s any way we can tax ourselves into prosperity.”
Tax revenues, even before this substantial tax cut fully goes into effect, have lagged. Going into the last month of this fiscal year, individual income collections, which would decrease when that portion of the new policy is fully phased in by 2022, have fallen $99 million below budgeted expectations. Sales tax collections were $55 million below projections. Leaders have stuffed at least $81 million in one-time, non-recurring transfers to help balance the current year’s budget.
If the new tax cut is the boon that legislative leaders say it will be and leaders can lower spending or find other revenue methods, revenue should not be a concern, economists said. But until those play out, economists and politicians alike will ponder the revenue question closely moving forward.
“Long term, it doesn’t look very positive for revenues,” Webb said. “We should show slight revenue growth, but the slow national economy is hard on us. The tax cuts make it even harder.”
Part two of the series will examine the expectations and ultimate failure of Kansas’ largest tax cut in history, which lawmakers there repealed four weeks ago.