Economist Arthur Laffer, an adviser to former President Ronald Reagan whose beliefs helped shape U.S. economic policy in the 1980s, has endorsed Mississippi House Speaker Philip Gunn’s proposal to eliminate the state’s income tax while raising sales, “sin” and other consumer taxes.
“For decades, I’ve worked with state legislators to eliminate the tax that is the single greatest threat to state economic growth and prosperity — the income tax,” Laffer said in a statement in a Gunn press release. “My hat goes off to (Gunn) and his colleagues for their bold plan to make Mississippi more prosperous through income tax elimination and fiscal discipline. America is watching. Mississippi has a once-in-a-generation opportunity to re-position itself for economic growth.”
The House leadership’s proposal, HB 1439, awaits action in the Senate, where reaction from Gunn’s fellow Republican Lt. Gov. Delbert Hosemann has been lukewarm and noncommittal. Republican Gov. Tate Reeves, who himself has proposed eliminating the state income tax, has said he opposes the plan’s commensurate increases in other taxes, such as adding 2.5-cents to the state’s 7-cents on the dollar sales tax.
Gunn’s plan would also over time cut the sales tax on groceries in half.
Economic and policy experts’ reactions to and analysis of Gunn’s proposal have been mixed.
The conservative Tax Foundation, on whose policies Gunn said he based his proposal, has agreed with Reeves that the income tax should be phased out without personal exemptions and offsetting tax increases Gunn proposes. It warned that some of Gunn’s sales tax increases — 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.
A study by economics professors at the University of Mississippi found that the bill would increase the state’s gross domestic product by $371 million annually by making the tax structure more efficient. In general, the study found that the income tax, which the House plan would eliminate, creates inefficiencies in the economy while a tax on consumption, such as the sales tax which would be increased by the House plan, does the opposite.
Another analysis by a progressive Washington, D.C.-based think tank warned that the plan would put too much of the tax burden on poor people. It said the bottom 60% of Mississippi’s income earners would be paying more taxes under the legislation while the top 40% would be paying less.
Other conservative-leaning groups, such as Empower Mississippi, have generally surmised the bill would positively impact the state.
Hosemann has said the proposal needs more scrutiny, and called for a study from the state economist.
In a statement Thursday, Gunn said: “I am very pleased to have Dr. Laffer’s support for HB1439. Dr. Laffer’s leadership was a key inspiration for President Reagan’s transformative tax cuts, which set off an unprecedented boom in the American economy. There is no bigger name in tax reform circles nationally than Dr. Laffer. His support demonstrates the strength of HB1439. It is a credit to the hard work of Chairman Trey Lamar, Speaker Pro Tem Jason White, and our House members. As Dr. Laffer said, this is a once in a generation opportunity. I urge Lt. Governor Hosemann and our Senate to work with the House to bring transformative tax reform to Mississippi this session.”
Laffer, who has been called “the father of supply side economics,” promoted the idea that lowering tax rates could result in higher revenues. He created the “Laffer curve,” which shows that, starting from a zero tax rate, increases in taxes increase government revenue, but at some point higher taxes begin to reduce revenue — cuts to marginal rates increase tax revenues.
Laffer’s theories influenced U.S. economic policies, including Reagan’s 1981 economic plan.