Will Mississippi Be the Next State to Phase Out its Income Tax?

Taxes

Mississippi Governor Tate Reeves (R), in his budget proposal for fiscal year (FY) 2022, has announced his goal of phasing out the state’s income tax by 2030.

Mississippi’s income tax currently has three marginal rates of 3 percent, 4 percent, and 5 percent. The corporate rates and brackets match the individual rates and brackets, and the brackets contain a marriage penalty because the rates kick in at the same marginal income levels regardless of filing status.

While Mississippi’s income tax has multiple brackets, it is “flatter” than most graduated-rate systems in that the top rate kicks in at a low marginal income level, meaning the benefit of the lower marginal rates is negligible. 

As shown in the table below, for tax year 2020, after the standard deduction and personal exemption are applied, an additional $3,000 goes untaxed. The next $2,000 in marginal income is subject to a 3 percent rate and the next $5,000 is subject to a 4 percent rate before the 5 percent top rate kicks in on taxable income above $10,000. The difference between this system and a 5 percent flat tax is $90.

Under legislation adopted in 2016, the first marginal rate is already being phased out. In tax year 2021, only $1,000 in marginal income will be subject to the 3 percent rate, with the other $1,000 exempt. Starting in 2022, only the 4 percent and 5 percent rates will remain, with the first $5,000 of income exempt from taxation (up from $3,000). 

Mississippi’s 3 Percent Income Tax Rate Will Phase Out by 2022
Mississippi’s Individual Income Tax Rate Schedules; Tax Years 2020, 2021, and 2022; All Filers
Tax Year 2020   Tax Year 2021   Tax Year 2022
3% > $3,000   3% > $4,000   4% > $5,000
4% > $5,000   4% > $5,000   5% > $10,000
5% > $10,000   5% > $10,000    

Source: State statutes; Bloomberg Tax. 

Gov. Reeves’ proposal seeks to build upon the ongoing phaseout of the 3 percent rate by also eliminating the 4 percent rate within five years. Then, subject to revenue availability, the governor hopes to eliminate the 5 percent rate so that, by 2030, Mississippi will join the ranks of the states with no income tax.

This plan is a bold one, which is why these reforms aren’t scheduled to happen overnight. Mississippi’s income tax generated nearly 43 percent of the state’s total tax collections in FY 2019, with nearly $1.9 billion coming from the individual income tax and $644 million from the corporate income tax. The state will need to see continued revenue gains over the next decade to phase out the income tax without increasing other taxes.

These revenue gains, moreover, would have to come from taxes other than the income tax if income taxes were to be eliminated entirely. Economic growth could increase income tax collections to the point that the state could afford to exempt more income while still experiencing revenue growth, but continuing the phasedown to the outright repeal of individual and corporate income taxes would require growth of other tax collections sufficient to cover the difference, no easy matter.

Working in Mississippi’s favor is the fact that state policymakers have already demonstrated a willingness to “play the long game” when it comes to achieving pro-growth tax reforms. The 2016 law that is currently phasing out the 3 percent income tax rate also initiated a phaseout of the state’s franchise tax, which is set to be completely repealed by 2028.

Currently, seven states entirely forgo individual income taxes, and two additional states—New Hampshire and Tennessee—tax investment income but not wage income. (Effective January 1, 2021, Tennessee will repeal its “Hall Tax” on interest and dividend income, meaning there will soon be eight states that do not tax individual income at all.) If Gov. Reeves’ proposal is adopted and fully implemented, Mississippi could become the sixth state to forgo individual and corporate income taxes and one of only three states—joining South Dakota and Wyoming—to go without an individual income tax, a corporate income tax, or a gross receipts tax.

Even if full income tax repeal is out of reach, however, the state could certainly reduce tax liability, particularly for lower-income residents, by continuing to increase the amount of income that is exempt from taxation, eliminating the first two brackets so a single-rate tax remains, and then reducing the rate below 5 percent.

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