As he tours the state selling his plan to eliminate Mississippi’s individual income tax and increase sales taxes, House Speaker Philip Gunn utters a common refrain: “No one has really been able to tell me why from a policy standpoint it’s a bad idea … From a policy standpoint, no one’s been able to poke a hole in it.”
But leaders and groups across the political spectrum have poked holes in or raised concerns about his plan. And those holes and concerns have been based primarily on policy — the particulars of Gunn’s proposal, not politics.
Advocates for poor and moderate income Mississippians say the plan would unfairly shift more of the state’s tax burden onto them. Ditto for retirees.
Big business interests such as manufacturers fear the sales tax increases in the plan would increase their “input” costs drastically down their supply chains. Small businesses fear this, too.
Some of Gunn’s fellow Republican lawmakers fear the sea change in tax structure would tank the state budget. Democratic lawmakers fear this, too.
Farmers, teachers, business leaders, conservatives, progressives, the lieutenant governor and Senate, the governor — who himself advocates eliminating the income tax but opposes corresponding sales tax increases — have expressed skepticism, if not outright opposition, to Gunn’s proposal. Analyses by state economics experts have been mixed, and even the conservative think tank Gunn credits with the impetus for his proposal has panned some particulars of the plan.
So far, no Mississippi statewide elected leader or major business or policy group has fully endorsed Gunn’s plan, and even those who support the concept do so with caveats, reservations and concerns about its particulars and unintended consequences.
Mississippi’s National Federation of Independent Businesses, which represents the state’s small businesses, briefly endorsed Gunn’s plan when he rolled it out in February. In a statement at the time, NFIB said: “Our members are behind this 100% … Eliminating the personal income tax would provide much-needed financial relief to small business owners struggling to recover from the economic crisis created by the COVID-19 pademic.”
But within a couple weeks, NFIB walked back its endorsement, saying in a new statement: “While our members support the idea of eliminating the state individual income tax, the devil’s in the details, and (the plan) would end up helping some small business owners but raising taxes on specific industries … We will continue to work with legislators … on a final bill that doesn’t pick winners and losers but helps small businesses.”
Economist Art Laffer, an adviser to former President Ronald Reagan, in March endorsed Gunn’s tax plan. But in a subsequent interview with Supertalk Radio, Laffer admitted he had not read the particulars of the plan, and mainly just endorses the idea of personal income tax elimination.
But Gunn says his plan is based upon good “economics 101” principles — “more sound and better tax structure is one based on consumption rather than income tax.” He said the nine U.S. states with no income tax, including Florida, Tennessee and Texas, are economically thriving and attracting more people unlike Mississippi, one of just three states to lose population since 2010.
No state has ever phased out an individual income tax. Alaska, the only state to eliminate an existing income tax, did so in one fell swoop. For Mississippi, the shift would be seismic: Individual income taxes generate about $1.8 billion a year, or 32% of the state’s revenue.
“Those states that don’t have an income tax, they seem to be prospering very well,” Gunn said. “I know other factors come into play — don’t get me wrong, Florida has got Disney World and they’ve got beaches — but it is a factor. You see retirees and young millennials going to those states.”
Gunn’s proposal, the “Mississippi Tax Freedom Act,” would exempt most Mississippians from individual income taxes in its first year, and totally phase out the tax over 10 years or more depending on growth “triggers” being met.
Gunn says that for individuals under his plan, “$1,500 stays in your pocket right off the bat, and for a married couple that is $3,000 that stays in your pocket.”
“In five to seven years, we raise that exemption to $100,000 per taxpayer, $200,000 per couple, and that would be $9,000 that stays in their pockets,” Gunn said. “That’s real tax relief. That will help attract young people, help make them stay or at least give them a reason to stay in Mississippi.”
It would phase out the income tax through exemptions. In the first year, the personal income exemption would increase to $47,700 for individuals, $95,400 for joint filers. This, Gunn said, would mean that 60% of Mississippians would pay no income taxes starting in the first year.
For each year after, exemption increases would be funded by any revenue growth over 1.5%. Gunn said that given historic growth data, this should totally exempt all taxpayers within 10 to 12 years.
“Growth in Mississippi over the last 10 years has averaged 3.2%,” Gunn said.
To offset the revenue lost from the income tax exemptions, Gunn’s plan would increase the state sales tax from 7% to 9.5% on most retail purchases.
Purchases of many big-ticket items currently at less than 7% would also see an increase of 2.5 cents on the dollar. For instance, automobiles, now subject to a 5% sales tax, would see that increase to 7.5%.
The proposal also would raise excise taxes on cigarettes by 50 cents per pack.
But Gunn’s plan would also phase in a cut on sales taxes on groceries from 7% to 3.5% over five years. This is one of Gunn’s major selling points of the plan, and a way to combat complaints of more regressive taxation hurting people with low incomes or retirees who are already exempt from income taxes. Since some cities, particularly small towns, rely heavily on grocery sales tax revenues, Gunn proposes increasing the state sales tax “diversion” to cities to make up for any grocery tax losses.
While the income tax and grocery tax breaks would be phased in over years, the increase in sales and other taxes would begin immediately. The breaks would cost about $269 million the first year, but some estimate the increased sales taxes would bring in about $1 billion. This imbalance, which could last for years, has raised some concerns. But Gunn proposes about $500 million from this initial windfall be placed into a budget stabilization fund in case of shortfalls.
Gunn has been touring the state for months now, promoting his plan to various local leaders and civic groups. He’s also been countering arguments and concerns.
“In every scenario, we’ve calculated and determined most people end up with more money in their pocket,” Gunn said. “Putting more money, disposable income, in the pockets of our citizens is a good thing.
“I don’t know who could argue that.”
One analysis of Gunn’s tax proposal, by the progressive Washington-based Institute of Taxation and Economic Policy, said the bottom 60% of Mississippi wage earners would end up paying more taxes while the top 40% would pay less.
The study said that lower and middle-income Mississippians already have a greater tax burden than the state’s wealthiest, and the new plan would exacerbate that. The study reported those earning less than $49,100 would see a net increase from the consumption tax increases, in a state where the median household income is $45,792. A person making $23,000 a year, the study said, would see an overall tax increase of $270 a year, while a person making $924,000 a year (the top 1%) would see a tax decrease of $28,610.
Gunn says such projections are wrong, and his plan “provides relief to the poorest of the poor first, and that’s unusual — it’s usually a top-down thing.”
Gunn and other proponents of the plan note that the poorest people in Mississippi — those receiving food benefits — already don’t pay taxes on most groceries, and that the companion grocery tax cuts will help others of modest means.
“Most of what you spend your money on is not subject to the sales tax,” Gunn said. “In Mississippi, we don’t tax gasoline via the sales tax — we put an excise on that. We don’t tax medicines, your mortgage and your insurance are not, so many things are not subject to a sales tax … This puts the power in the hands of the taxpayer … Here, to a degree, you decide how much tax you pay. You control that by deciding what your tolerance is for taxes, or you don’t buy the things that cost you taxes.”
But advocates for the poor say sales tax increases result in a higher burden for poor people, who are forced to spend more of their income for basic needs. Currently, with Mississippi’s already relatively high sales tax rate, those earning less than $16,100 a year pay more than 10% of their income in state and local taxes. Those making more than $162,000 pay 6.5% of their income on state and local taxes. Advocates say the new plan would exacerbate disparities.
And as he sells his plan to various civic leaders across the state, Gunn has made comments that would appear anathema to helping the poorest of the poor.
“We all benefit from all the stuff that government provides,” Gunn said. “It only makes sense that everybody share in that. Right now, not everybody pays income tax. You’re broadening the pool of taxpayers, so the burden is less on everyone. Secondly, you’re bringing in out-of-staters, people traveling through the state, using the roads and services.”
House Minority Leader Robert Johnson, D-Natchez, is one of a handful of Democrats who voted for Gunn’s plan in the House in the 2021 session. He said the Democratic Caucus hasn’t endorsed it, and he’s still got concerns about the plan and believes it needs more work. But he believes Gunn is making an effort to create an egalitarian tax structure. He said he was impressed that Gunn was willing to raise taxes on “people who have had tax breaks for years” to balance out income tax elimination — although he noted that Gunn is already backtracking on sales tax increases on manufacturing and farm equipment after an outcry from their lobbies.
“The fact that he would even entertain that is promising,” Johnson said. “He didn’t just say, ‘I’m going to cut taxes and eat it and cut a bunch of agencies budgets to do it’ … The people that elect us and work and pay taxes, the working man and woman out there, would see an immediate benefit, and the grocery tax cuts … I think this will take more work. But I’m confident there will be input, and we’d like to be more involved.”
One group that doesn’t pay Mississippi income taxes is retirees, and Gunn has had to fend off criticism that his plan would hurt them financially with increased sales taxes.
“A lot of retirees say, ‘I don’t pay income taxes, but you’re raising my sales tax,'” Gunn said. “I have walked through the scenario with those folks who are willing to share their financial situation with us, and in no situation is anyone being cast into poverty.
“You sit retirees down and ask what do you spend your money on,” Gunn said. “Medicine, gasoline, grandkids — most of it is not subject to sales tax. What you’re generally left with is groceries and grandkids, and this is cutting the grocery tax. Take that couple living on $40,000 a year fixed income, and they usually spend about 1/4 on stuff subject to sales taxes, about $10,000 a year. That means their increase in tax is about $250 a year, around $12 a month, so you ask them could they absorb $12 a month, and the answer is usually yes.
“But wait a minute, we’re not done,” Gunn said, “because we are cutting the grocery tax in half … Do the math on that, and it’s about $364 a year they are paying in taxes on that, and we are cutting that in half. So on the one hand they’re going up $250, but we’re giving them back $182, for a net loss of less than 70 bucks a year, less than $10 a month. They say they can absorb that — but wait a minute, what better to give your grandkids than to eliminate the income tax for them?
“Imagine how much money any of us would have if when we started our careers we didn’t have to pay income tax to the state of Mississippi,” Gunn said. “If I had that money back in a mutual fund somewhere, no telling how much that would be …. Every one of them I’ve talked with say, ‘Absolutely, I’m willing to do that.'”
Gov. Tate Reeves has also proposed eliminating the state’s personal income tax. But he says it should be eliminated without any offsetting increases in sales or other taxes. He says economic growth would cover the cuts, and has otherwise not presented a very detailed proposal.
Reeves has said he appreciates fellow Republican Gunn bringing income tax elimination to the fore in the Legislature, but has criticized the speaker’s plan for its consumption tax increases.
“I wouldn’t want to be a Republican that votes to increase taxes substantially for certain segments of the public,” Reeves said. “… I personally support tax cuts, not tax swaps or tax transfers or tax increases … I don’t think we ought to sit here and pick and choose who to take money from. I think we ought to take less from everybody.”
Gunn says simply eliminating the personal income tax without replacing the revenue will not work.
“We have a $6 billion budget,” Gunn said. “By the time you eliminate the income tax and cut the grocery tax in half, that’s $1.9 billion. You can’t just cut a third of your home budget, or your business budget or your church budget and survive. You just can’t do it, and government can’t either. That’s what they tried in Kansas, and ended up raising taxes a couple of years later by $400 million.”
Led by Gunn and then Lt. Gov. Reeves, the Legislature next year is wrapping up a multi-year phase-out of the lowest, 3% personal income tax bracket on the first $5,000 of people’s income. This leaves a 4% tax on income from $5,000 to $10,000 and a 5% rate on income exceeding $10,000.
Reeves says the phase out of the bottom bracket shows Mississippi could eliminate the rest of the income taxes over time through growth without raising other taxes. Gunn disagrees.
“Some have said just phase it out like we did the 3%, half a percent a year or so,” Gunn said. “If we did that, it would take until 2051 to get rid of the income tax, and that’s assuming 3% growth. If we had 2.5% growth, it would take until 2085. We’d all be dead.
“We are trying to get some immediate tax relief,” Gunn continued. “We are trying to retain our young people, to stop what we call brain drain … Young people would not be sitting there saying, ‘Hey, I’m going to move to Mississippi because 30 years from now they are not going to have an income tax.'”
Analyses of Gunn’s plan from economists, tax think-tanks and business groups have been mixed as to the net results for the state and particular interests.
The conservative Tax Foundation, which generally supports cutting taxes and shifting from income to consumption taxes, has served as Gunn’s spirit animal in his push for the tax change. But the foundation’s analysis of Gunn’s plan has been somewhat critical of particulars.
For starters, it says phasing out the tax through expansion of exemptions “is inferior to an approach which gradually lowers rates.” And, in direct opposition of the Institute of Taxation analysis, the Tax Foundation says the cut in grocery taxes would benefit middle and higher income people more than lower income people.
“I would suggest reducing rates over time instead of dramatically increasing the personal exemption — which would immediately eliminate taxes for 60% of taxpayers, but would still leave many on the hook for years,” said Katherine E. Loughead, senior policy analyst with the Tax Foundation. “I think that would create some complications in terms of filing, making it difficult for people to know whether they’re still being taxed — just create complexities for those at or near that threshold and a choppier process. The better approach is to phase out the rates, so people are still filing and still owe some, but the amount is reduced until it’s gone.”
Loughead said that while cutting the grocery tax may be “pretty popular politically on both sides of the aisle,” it likely wouldn’t help the people it’s intended to help the most.
“The middle and higher income people spend more on groceries,” Loughead said. “It’s great in theory, but it would be better for lower income people to pay as low a rate as possible overall on all consumption.”
Loughead said broadening the sales tax base overall would be better than picking and choosing certain areas to increase or exempt, although she said the plan should try to avoid sales taxes on “inputs,” such as equipment and supplies for manufacturing. This results in “tax pyramiding” that ends up hitting consumers with multiple taxes, some of which they don’t clearly see when they happen down the supply chain.
“I know it’s not popular, but currently motor fuels are subject to an excise, for roads, but not sales taxes,” Loughead said, “and including motor fuels in the sales tax base would generate a lot of revenue. Applying sales tax to fuels and to consumer services, things like hair salons and other personal services, would broaden that base.”
House Ways and Means Chairman Trey Lamar, one of the architects of Gunn’s tax plan, said he understands the Tax Foundation’s principles, but realpolitik means some of those have to be compromised to pass a tax plan through the Legislature.
“We’ve had some of those conversations, and I wouldn’t say (a gas sales tax) is totally off the table, but you also have to get your votes, and from a political standpoint, so far our plan doesn’t tax anything new that’s not taxed,” Lamar said. “Taxing haircuts — if you really want to tick people off, tell every hairdresser in the state there’s going to be a tax on haircuts … I understand how things should be in a perfect world, and the Tax Foundation lives in a perfect tax world. Other factors come into play — not saying they are wrong — it’s just also what can you actually get the votes to do.”
So far, no major business groups are joining Gunn in his push for the tax plan, and some, like NFIB, have raised concerns. The Business and Industry Political Education Committee, a group that scores lawmakers each year with its “Business and Jobs Report Card,” gave House lawmakers who voted for Gunn’s tax plan lower scores, deeming a vote for it as anti-business.
“(Gunn’s plan) would have increased taxes on the following industries: manufacturing, farming, timber, dairy and automobile dealers,” BIPEC said in a statement. “Electric power associations would have also faced increased costs that would likely be passed on to consumers, including business customers … While (an amendment) removed tax increases on some industries, many still faced significant tax increases on business inputs.”
The conservative Empower Mississippi group supports lowering or eliminating the state income tax and has said Gunn’s plan has some merits, but has not fully endorsed it.
“Empower believes there is a path to eliminate the income tax that leads to more jobs, higher wages and greater economic and population growth, but the mechanics matter,” the group said in a statement. “The bill that emerged from the House was a good starting point for an important discussion, but we believe there is an opportunity for more stakeholders to come together and improve upon it.”
The major long-term effects of the plan have been the subject of debate since it was unveiled this year. One study, by two economics professors at the University of Mississippi, found the proposal would increase the state’s gross domestic product by $371 million a year and make the tax structure more efficient. Another study by the state economist and others with IHL’s University Research Center, commissioned by Lt. Gov. Delbert Hosemann, found the plan would produce only minuscule growth in GDP, jobs and population through the year 2035.
Gunn’s plan got no hearing or vote in the Senate during the 2021 legislative session, and Lt. Gov. Hosemann and his leadership team have been lukewarm on it at best. But the Senate is planning to have hearings on the issue this summer, likely in August.
Asked for comment from Hosemann recently, his Deputy Chief of Staff Leah Rupp Smith in a statement said: “Senate Finance Chairman Josh Harkins will hold hearings on tax reform in August. These hearings will likely inform legislation introduced in the 2021 session.”
Otherwise, Hosemann and Senate leaders have said they favor reducing taxes, but urge caution and said any major change in tax structure should be thoroughly vetted.
“We are working to put hearings together for the Senate members to really go over this, and look at all phases of our fiscal policy, income, our revenue, our tax exemptions, diversions — everything that has to to with fiscal policy,” said Harkins, R-Flowood. “For instance, people would be amazed at how much of what we collect is taken off the top in diversions … Texas is booming, with no income tax, but let’s take a close look at Texas — they have 90 something different business services they tax. South Dakota has over 100. Mississippi has only 76, like we don’t pay a sales tax when we get a hair cut for instance. They’ve expanded their base and draw sales tax from more than we do … I want to make sure everybody understands where everything is coming from and where it’s going.”
Harkins said the Senate hearings will likely include numerous economic and tax experts.
“This is a major policy decision,” Harkins said. “… This is a third of our budget, so it’s important to get it right. I just want to make sure we don’t get out over our skis on this. We will investigate it and make sure whatever we do is prudent and responsible and going to work.”
Senate Minority Leader Derrick Simmons, D-Greenville, said vetting of any plan would include ensuring it doesn’t result in cuts to already underfunded services, and that it doesn’t disproportionately benefit wealthy people.
“Any proposal to overhaul our already regressive tax code would need extensive study,” Simmons said. “Many policymakers are concerned about how we continue to fund vital functions of government such as education, healthcare, infrastructure and how we reward and retain state employees.”
Gunn said, “We are going to make sure the functions of government are not compromised,” and said any talk that his plan would gut education or other spending “is a red herring.”
Gunn continues to sell his plan across the state.
“The only way this will happen is if the people decide they want this — you, the people, will have to get behind this,” Gunn said at a recent forum arranged by Empower Mississippi.
“We’ve got to get the Legislature on board,” Gunn said. “I can’t go down there and do that, the people in the Legislature have got to hear from their constituents, the grassroots. I’m here to preach the gospel of income tax elimination, make converts and then make disciples. That’s why I’m here today. I hope I made some converts in this room, and now we need to go out as disciples and spread the word. Everything in the Legislature operates on votes, and we can’t pass Mother’s Day if we don’t have the votes.”
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