Instead of pushing short-term tax gimmicks that will have very little impact on our state’s economy, leaders should focus on income tax elimination.
Democratic gubernatorial candidate Brandon Presley wants to stop applying the sales tax to the purchase of groceries. He also wants to cut the “car tag” in half.
These proposals make for fine TV commercials. They are popular. They are also unworkable gimmicks that would yield little discernible impact on Mississippi’s economy.
The far better pursuit is to join states like Texas, Tennessee, and Florida in becoming a “no income tax” state.
Eliminating Sales Tax on Groceries Will Have Negligible Impact on Economy, but Will Hurt Local Governments
There is no “grocery tax.” There is a sales tax that Mississippians pay when they buy things, including groceries.
There’s no doubt that families are feeling the strain at the grocery checkout, and everywhere else. Three solid years of persistent inflation will do that. But not charging sales tax on the purchase of groceries will have a negligible effect on Mississippian’s bottom line and will not contribute to improving the overall economic health of the state.
It will, however, negatively impact local tax collections, because cities get a nearly 1/5th portion of all sales tax collected in their jurisdiction–called a “diversion.” Eliminating the sales tax on groceries would eliminate funding from your city, which is why the Mississippi Municipal League has historically opposed this idea.
It bears mentioning that Mississippi already makes provision for the poor when it comes to sales tax on groceries. No sales taxes are charged on groceries purchased with food stamps.
Cutting Car Tags is an Illusion, Potentially an Expensive One
Proposals to cut car tags are equally complicated. Counties assess and collect the taxes on a car tag. Not the state. So what the state would do is essentially to pay the counties for half the cost of the tag through a credit.
Herein lies the rub. There is nothing that would prevent counties, having received the credit, from raising the price of a car tag. The effect of this would be to cost the state even more money, while eating into any “savings” the person buying the car tag would experience.
Let’s say the price of a car tag is $150. Under the proposal, the state sends the county $75, bringing the taxpayer’s price down to $75. But then, what if the county raises the price to $230 after the credit? What would have cost the state $75 at the inception of the program, now cost $115. Meanwhile, the actual savings to the taxpayer is now less than 25 percent. Multiplied over hundreds of thousands of vehicles, the cost of the program could become massive.
But even if counties do not take advantage of the credit this way, the proposal is at best the rearrangement of deck chairs. Think about it. Mississippians pay the taxes that fund the state government. The state government then sends counties a credit so that Mississippians pay less for car tags. Mississippians aren’t actually paying less in taxes. The taxes are just being funneled through the state rather than paid directly to county tax collectors.
Eliminating the Income Tax Could be Transformative
A sales tax is a tax on consumption, or what people take out of the economy. An income tax is a tax on productivity, or what people contribute to the economy. In an ideal world, tax punishment for productivity would be minimal, because for economies to grow more people need to be working, earning, and ultimately, spending.
The theory bears out in practice. There are nine states without a state income tax in the United States. They dramatically outperform Mississippi, but more importantly, they dramatically outperform national averages.
Between 2010-2019, the economies of states with no income taxes grew by over 30 percent, or at 36 percent more rapid pace than national average. Mississippi’s economy was largely treading water during this period.
Population growth in no income tax states was nearly 13 percent during this period, more than double the national average. Mississippi, again, treaded water.
Not only did the broader economy outperform in no income tax states, but revenue to government for its core functions did not suffer. The tax burden in no income tax states was roughly half that of Mississippi, measured as a percentage of the overall economy.
But revenue in these states climbed much more rapidly. Between 2010-2019, revenue growth in no income tax states exceeded 50 percent. By contrast, revenue growth for Mississippi’s state government came in at just under 33 percent. Mind you, that is state revenue growth that still far exceeded the actual growth in our economy or in people’s income levels.
Short version: states like Texas, Florida, and Tennessee are proof not only that a state can survive without an income tax, but that states can absolutely thrive without an income tax. It makes sense if you start with an understanding that the way economies grow is through private sector productivity and investment. Allowing people to keep and spend more of what they earn is a recipe for long-term state success.
Author’s Note: The data on income tax elimination was compiled by the author in preparing a report for Empower Mississippi with economist Jorge Barro, Ph.D. from the Baker Institute at Rice University and Joseph Bishop-Henchman of the National Taxpayer Union Foundation. The report included not only comparative analysis, but a dynamic analysis on the effect of income tax elimination. A copy of the report can be accessed here.