Lawmakers strike a deal on historic cut of Mississippi state income tax

The plan will eliminate the 4% bracket over four years and step down the 5% bracket over six years. 

UPDATE March 27, 4:00 p.m.: 

On Sunday, after a procedurally required hold on the filed conference report the House and Senate both adopted the report on the floor late in the afternoon.

The House passed the conference report with little to no questions or conversations by a vote of 92-23. The report was brought up in the Senate at the same time but took a few more questions from members than the other chamber.

The Senate ultimately adopted the report by a vote of 39 to 10. The bill now heads to Governor Tate Reeves to be signed.

“We have been advised we can absorb this cut and still invest in the core government services constituents expect us to fund in infrastructure, education, healthcare, and other areas,” Hosemann said. “We welcome any opportunity to return taxpayer dollars to hard-working Mississippians.”

ORIGINAL STORY: 

A long-awaited agreement on what to do about eliminating the state’s income tax has finally come just days before the end of the 2022 Legislative Session.

Originally proposed in the 2021 session by Speaker of the House Philip Gunn, eliminating or reducing Mississippi’s income tax has become one of the most hotly debated agenda items of the 2022 session.

The 2021 plan was killed in the Senate prior to adjournment for the year, which led the House to present another plan in 2022, shortly followed by the Senate’s own version of a tax cut. The House offered various other revisions to their plan along the way. Even Governor Tate Reeves proposed a plan just last week.

Where they are now

With an 8:00 p.m. filing deadline set for Saturday night, conferees have met and agreed upon the finalized plan for cutting the state’s income tax. The conference report will be added to HB 531. 

Highlights of the income tax cut compromise plan:

• Eliminates the 4% tax bracket by 2023
• Single income taxpayers do not pay taxes on first $18,300 of income
• Married filers do not pay taxes on first $36,600 of income
• 5% bracket cut to 4.7% by 2024, 4.4% by 2025 and 4.0% by 2026
• Provides tax relief of $525 million per year by 2026

The plan does not raise any additional taxes and will not cut the grocery tax or car tag fees like prior proposals set forth.

Sen. @SenatorHarkins, Chairman of Finance, on income tax cut decision #msleg pic.twitter.com/F5WJv4phG8

— Yall Politics (@MSyallpolitics) March 26, 2022

Speaker Gunn spoke to the press on Saturday regarding the compromise plan. He said he is proud that the Legislature was able to find a way to eliminate that first $525 million in income taxes for Mississippians. Gunn said while this is a great start, they will continue fighting for more tax freedom for citizens.

“Full elimination is the goal, it is still our goal. Taking this deal today does not forgo our goal of total elimination, but it is the largest tax cut in the history of our state,” said Gunn. “It provides significant, real relief to our citizens.”

Lt. Governor Delbert Hosemann maintained his caution following the compromise agreement, saying that it allows government services to continue to be provided in a responsible way while easing the tax burden on Mississippians.

“Moving to a flat four percent income tax puts more than $500 million in recurring dollars back in taxpayers’ pockets and makes Mississippi one of the most competitive in the nation in terms of income tax rates,” Hosemann said in a statement. “This tax cut is the largest in Mississippi’s history.  It is also responsible.  Our constituents expect us to fund core government services in infrastructure, education, healthcare, and other areas.  Our budget experts have assured us we can continue to do this and significantly ease the tax burden on hard-working Mississippians.”

The adopted conference report must still pass the floor in both chambers before it can head to the Governor and become law. Due to procedure, the chambers cannot take the bill up until tomorrow which all indications are both the House and Senate will do Sunday.

UPDATE: 

Governor Tate Reeves weighted in on the compromise, tweeting:

“The deal agreed to by the House and Senate is a $500M+ tax cut. That’s good. I still believe we can and should eliminate the income tax. The fiscal environment is right. Sadly, the political environment in the MS Senate is not.

“Strong action that will change our state for the better takes time and passionate partners. For transformative change, we need our state’s Lieutenant Governor to work with bold conservatives.

“This is a good step. It is a win at the beginning of this fight. It is not the end.“

Strong action that will change our state for the better takes time and passionate partners. For transformative change, we need our state’s Lieutenant Governor to work with bold conservatives.

This is a good step. It is a win at the beginning of this fight. It is not the end.

— Governor Tate Reeves (@tatereeves) March 26, 2022

How they got here

Over the past few weeks after both House and Senate plans were presented, members of each chamber explained their points of view on a tax cut versus a tax elimination.

Speaker Gunn remained steadfast that Mississippi deserved what he called “transformative tax policy,” which could only come in the form of an elimination. He was challenged by members of the body, mainly in the Senate, and public who questioned if Mississippi had enough sustainable revenue to lose such a large portion of the state’s budget with an elimination. Currently, income tax revenue makes up one-third of Mississippi’s yearly operating budget.

Members of the Senate maintained that a slower phase out was advisable to ensure the state budget could sustain the change. This prompted changes to each chamber’s plan in order to compromise for an agreement.

To add another option to the table, Governor Reeves presented his own plan for consideration as members moved through the process. Reeves’ plan showed an eight-year phase out. The top marginal rate would have been immediately cut from 5% to 3.5%, which would be roughly $600 million, less than half of the state’s current budget surplus.  Reeves also called on the legislature to reduce the marginal rate by an additional 0.5% for the next seven years to achieve the full elimination of the income tax.

RELATED: Governor Reeves calls on Mississippi Legislature to eliminate income tax, introduces 8-year phase out plan

While both chambers have agreed that Mississippi will have a significant surplus in revenue for at least FY 2022 and FY 2023, the reliance on that continued growth over the next several years has put them at odds.

While Gunn’s camp has operated on the belief that now is the perfect time to eliminate income tax and provide relief during a major period of inflation, Lt. Governor Delbert Hosemann’s leadership in the Senate have been wary that moving too drastically on an elimination could leave the state in a bad financial situation a few years down the road.

At the Joint Legislative Budget Committee that happened just one day before the major filing deadline, Hosemann said he is, and has been, in favor of eliminating taxes, but wants to move in a conservative way that will not require the legislature to come back to the taxpayers in a few years and say “oops.”

At that meeting the legislature adopted a new revenue estimate for FY 2022, raising it to $6.8 billion. It also increased the FY 2023 estimate to $6.9 billion. Mississippi is currently operating at a budget of roughly $5.8 billion.

How it Started

Kicking off the 2022 Legislative session the House dropped HB 531, the Mississippi Tax Freedom Act of 2022. The original language of the bill eliminated the state’s income tax by increasing sales tax 1.5% and cutting grocery tax from 7% to 4%.

RELATED: Mississippi House set to pass its version of Income Tax Elimination

At the time the House passed the bill Speaker Gunn said, “If there’s a better idea, then we welcome that. Unfortunately, no one else has presented an idea at this point.”

Not long after that action, the Senate dropped their own version of an income tax cut proposal, however it was not a complete elimination and met criticism from House members and the Governor that it was not transformative policy.

“We are doing something we believe is fiscally responsible and it puts us in a position in four years to come back and asses the environment, asses the economy and see where we are and we can proceed forward,” said Senator Josh Harkins.

SB 3164 originally cut sales tax on groceries from 7% to 5%, phased out the 4% income tax bracket over four years, cut the state’s portion of the car tag revenue, and provided a one-time rebate check of up to $1,000 for citizens with tax liability.

RELATED: Mississippi Senate income tax cut plan makes its way through Finance Committee