The Senate killed Republican House Speaker Philip Gunn’s proposal to eliminate the state income tax and increase sales taxes without a vote on Tuesday, letting the measure die in committee under a deadline.
House GOP leaders, angered by the Senate move, late Tuesday inserted the tax overhaul language as an amendment into a “bond bill” that would borrow money for projects statewide.
“The Senate has punted the ball,” House Ways and Means Chairman Trey Lamar, R-Senatobia, told House members on Tuesday. “… They killed this bill. What has the Senate done? They stayed up until 1 a.m. talking about marijuana. They’ve spent endless hours trying to eliminate business incentives that have worked for years.”
“It’s time for bold action, time to continue to fight,” Lamar, a co-author of the tax swap plan, said before the House voted 89-22 to revive the tax measure.
But the tax plan’s eventual passage remains very doubtful as the Mississippi legislative session enters what is scheduled to be its final weeks. The House’s altering of the bond bill to include the tax overhaul could also make it subject to procedure and rules challenges in the Senate.
Senate Finance Chairman Josh Harkins, R-Flowood, declined to take the bill up in his committee on Tuesday, the deadline for it to pass the full Senate. He said the Senate will instead call for a study committee to examine the issue over the summer and make recommendations to the Legislature next year.
House Bill 1439 would phase out the state’s personal income tax, through exemptions, over 10 years. It would cut the sales tax on groceries from 7% to 3.5% within five years. To balance these losses, it would increase the state’s 7% sales tax to 9.5% and increase taxes on many other things, such as farm and manufacturing equipment, by 2.5 percentage points.
Senate leaders, including Lt. Gov. Delbert Hosemann, have questioned whether the bill — introduced by the House relatively late in the session with little heads up to the Senate — has been thoroughly vetted for “unintended consequences” to the economy and state revenue.
“What I want to see is a thorough examination — by people smarter than me — of what impact this will have on our economy, what it will mean for instance, for productivity,” Harkins said. “The decisions we make will have an impact in a lot of areas, and we don’t want to be back here in four or five years trying to redo our taxes because we got something wrong.”
For instance, Harkins said, most owners of limited liability corporations pay personal income taxes instead of corporate taxes. If the personal income tax is eliminated, many businesses would likely switch to LLC formation, which would skew the House’s projections of balancing loss of income tax revenue with other tax increases.
Harkins said that an initial analysis of the House plan that Hosemann requested from the state economist showed that in its first year, initial phaseout of income taxes would cost about $269 million in revenue, but increases in sales, “sin” and other taxes would bring in an additional $1 billion — a huge “net plus” for a measure that is supposed to be “revenue neutral.” He said the analysis showed it would be seven or eight years before the cuts and increases in taxes balance out.
“Apparently the economist is revising numbers he’s given us — might have left out some things that are in the bill — but that’s all the more reason to wait and examine this more closely,” Harkins said.
Rep. Omeria Scott, D-Laurel, also questioned whether the cuts in income taxes, which will be phased in only if revenue “growth triggers” are met, will really balance out with increases in other taxes or net most taxpayers any savings.
“It sounds more like a Ponzi scheme to me,” Scott said.
As the Senate was coming into session Tuesday morning, Speaker Gunn was leaving the lieutenant governor’s office, after apparently making an 11th-hour pitch for the measure.
“We feel very strongly in the House that elimination of the income tax is a good thing for Mississippi,” Gunn said. “I personally do not think there is a bigger policy issue that we’ve ever done or ever will do.
“(The Senate) has some questions,” Gunn said. “We have answers for every one of those. My wish is that they would move this bill along, keep it alive and let us answer questions and work on it.”
Hosemann in a statement on Tuesday said: “It is always important to consider how we as conservatives can leave more money in taxpayers’ pockets. We plan on having a thorough joint conversation about tax reform this summer. A study should focus on truly broadening the base, incentivizing and rewarding hard work, strengthening economic development and training, and right-sizing government.
“We should also realize a system of taxation drives economic decisions for individuals and for businesses, and plan accordingly.”
After Harkins said he would not take up the bill, Gunn told media that House leaders were looking for ways to revive the legislation before the session ends.
“That’s what we intended for (the Senate) to do, keep this alive,” Gunn said. “There were lots of things they could have done to keep it alive … so we could have sat down and worked through any concerns.”
Economic experts and thinks tanks have offered mixed analysis on the impact of the tax overhaul. Some predict it would spur the economy, taking away a “tax on productivity.” Others say it would tank it by increasing taxes on business “inputs” and cause tax pyramiding with its increased sales and other taxes. Still others say it would unfairly place more of the tax burden on the state’s poorest people in shifting to consumption taxes.
Gunn and others point to economic booms in Texas, Florida, Tennessee and other states without income taxes. But Harkins on Monday said, “We’re not Tennessee, Florida or Texas — we’re Mississippi … We need to look at the data and most importantly do something responsibly to put the state in the best place competitively.”
The original measure would have been a tough sell on the Senate floor, facing opposition from many groups. While some conservative policy groups support the measure to phase out the state income tax while raising sales, sin and other taxes, many powerful lobbies — such as those representing farmers, small businesses, manufacturers and teachers — have voiced opposition.
Lamar said his amendment on Tuesday made some changes to address that. He removed the measure’s increases of 2.5 cents on the dollar for farming, logging and manufacturing equipment. As a result the amounts of the first round of income tax cuts would be reduced and the total phase-out of income taxes might take a year or two longer.
Gov. Tate Reeves, who himself advocates eliminating the income tax, said he opposes commensurate increases in other taxes in the House plan. He believes economic growth, and belt tightening by government, would cover any lost tax revenue.