The conservative Tax Foundation has been House Speaker Philip Gunn’s spirit animal in his ongoing push to eliminate the state’s income tax and shift to “consumer taxes” such as a higher state sales tax.
But on Monday, even the Tax Foundation panned Gunn’s proposal to overhaul the state’s tax base by phasing out the income tax and cutting taxes on groceries while increasing sales, use and “sin” taxes. This after Gunn said the Tax Foundation’s teachings — notably at a series of hearings Gunn hosted in 2016 — that “consumer taxes” are better and fairer than income taxes were an impetus for his proposal.
A week after Gunn rolled out his sea-change tax bill with little heads up even to much of his own GOP House caucus, he appears to be on an island politically.
Farmers, teachers, business leaders, conservatives, progressives, the lieutenant governor and Senate, the governor — who himself advocates eliminating the income tax — have expressed skepticism, if not outright opposition, to Gunn’s proposal. They have differing reasons, but there appears to be some consensus that the proposal should have been more thoroughly vetted, had more people’s input and more transparency before it was rolled out and passed by the House in less than 24 hours.
“Policymakers and taxpayers alike should be able to see a public fiscal note for the plan to ensure it meets lawmakers’ goals,” The Tax Foundation wrote in its new report. “… Broadly speaking, taxes on consumption are more economically efficient than taxes on income … When it comes to making major changes to the tax code, however, details matter.”
The Tax Foundation surmised that Gov. Reeves’ proposal — reducing the income tax rate without the personal tax exemptions and offsetting tax increases Gunn proposes — “would provide a more stable path to phaseout.” Reeves said that while he appreciates Gunn promoting a phaseout of the income tax, he opposes the commensurate increases in other taxes.
The Tax Foundation noted that the plan so far failed to provide “reliable revenue projections and a detailed accounting of how much revenue is projected to come from each offsetting change.”
The Tax Foundation warned that some of Gunn’s sales tax increases to offset the income tax phaseout — particularly on manufacturing machinery, farm equipment and other “intermediate transactions”— could cause “tax pyramiding.” Tax pyramiding is where the same good or service is taxed multiple times through the chain of production. The foundation said this would put some Mississippi businesses at a competitive disadvantage, and these tax costs would be passed on to consumers.
The foundation also warned that Gunn’s proposal to raise income exemptions until all taxpayers are exempted, as opposed to Reeves’ proposal to reduce tax rates, would increase the chance that the phase-out efforts would stall down the road, “with there being less political will to continue putting revenue growth toward further reductions.” It also “would affect the marginal rates at which investment decisions are made,” the foundation said, with small business owners who pay primarily individual, not corporate, income taxes, facing the same rate on marginal income, “initially limiting the impact on encouraging additional investment.”
One of Gunn’s selling points on his plan — and a way to combat complaints of more regressive taxation hurting people with low incomes — is the companion cut to grocery taxes, from 7% to 3.5% within five years.
The foundation said there is “empirical research suggesting that the higher general (sales tax) rates necessary to offset a reduced or zero rate on groceries have more of an impact on lower-income consumers than does the inclusion of groceries at the ordinary rate.” This is, in part, the foundation said, because groceries purchased with welfare dollars are already exempted from sales taxes.
“Above that threshold, grocery purchases tend to scale well with income,” the report said, and an ideal sales tax structure is one that “applies to a broad base of final consumer purchases at a single rate, while exempting business inputs to prevent tax pyramiding.”
Gunn has said he believes his proposal “is based on sound tax policy.” And as for folks opposed to it because their industries would see increases in their specific sales taxes, such as farm equipment, he said they’ve had low rates and have not been paying their fair share.
Both statements may be true. But the realpolitik is that Gunn created instant opposition from some powerful interests, such as the farm lobby and manufacturers, who would see sales taxes on their machinery increase from 1.5% to 4%.
Gunn and his top lieutenants included a teacher pay raise — that had been proposed in separate bills — in the tax overhaul. This would appear to be a sweetener to draw support for the measure and to show that many teachers would have thousands of dollars more in their pockets each year from tax cuts instead of just the $1,000-a-year raise.
But despite — or actually because of — this inclusion, many teachers have been angered, saying they’re again being used as political pawns. Public education advocates and lobbies have voiced opposition because they fear the long-range shakeout of income tax cuts will mean less spending on public education.
Gunn’s rapid rollout of the tax plan was apparently a hurry-up offense to avoid some early opposition. But that appears to have had an opposite effect in many corners, particularly with Lt. Gov. Delbert Hosemann and the Senate, whom Gunn needs onboard to pass the proposal.
Hosemann on Monday said he still hasn’t finished going through the bill, has many unanswered questions and, “The Senate is not Nancy Pelosi, we don’t adopt it and figure out how it will work after we pass it.” He said he is asking the state economist to run modeling on the plan and others to scrutinize it. He said he is unsure whether that could be completed by the end of this year’s legislative session.
The Tax Foundation, like Reeves, Hosemann and other fellow Republicans and fiscal conservatives, praised Gunn for broaching the state tax structure issue, even if they have reservations about or issues with his proposal.
“Make no mistake: This is a bold plan from state lawmakers,” the foundation said. “A change worth doing is worth doing right … With the bill now headed to the Senate, lawmakers should take the time that remains to ensure that the final legislation is sustainable and will enable Mississippi to meet its goals.”