House plan to eliminate income tax paints big vision, leaves big questions for Senate

• The Mississippi House passed a comprehensive tax plan Thursday, 88-24, that aims to eliminate the state income tax. Now, the State Senate must grapple with big questions about cost, timing, and impact.

The year is 2037. Mississippi has succeeded in eliminating its income tax and reducing the sales tax it charges on groceries, while providing considerable additional funding for education, roads and bridges and the public employees retirement system. It’s been done while making counties and cities whole, nay, increasing revenue to both.

That’s the big vision painted by HB 1, which passed out of the Mississippi House Thursday, 88-24, a bill which House Speaker Jason White has said is their top priority and Gov. Tate Reeves, who’s long supported income tax elimination, calls a serious effort.

Senators will now grapple with equally big questions over cost, timing, and impact of bill.

It was then-Lt. Governor Reeves in 2016 who kicked off the party with the Taxpayer Pay Raise Act, a bill which eliminated Mississippi’s 3 percent bracket on the first $5,000 in taxable income.

Reeves and former House Speaker Philip Gunn made another push toward income tax elimination in both 2021 and 2022, though each had their own ideas on how to accomplish the idea. The Senate, led by Lt. Governor Delbert Hosemann, was not ready to commit to the whole enchilada.

The end result was the compromise Tax Freedom Act. The law created the largest tax exemption among states that tax income and will yield a 4 percent flat tax when the phase-in completes next year. It is currently the largest tax cut in Mississippi history.

“The Plan”

HB 1 aims to eliminate the state income tax and reduce the grocery tax to 4 percent by 2037. House Ways & Means Chairman Trey Lamar estimates these cuts to be worth $2.2 billion upon full implementation. (This is a static estimate. They will be worth more when 2037 rolls around).

The cuts are partially offset with a new 5 percent sales tax on fuel and through a 1.5 percent local sales tax that will raise the effective general sales tax in Mississippi to 8.5 percent.

Lamar values the offsets at $1.1 billion, estimating the fuel tax will produce $400 million a year in new revenue for MDOT (my calculations were closer to $300 million) and the local sales tax will produce $700 million. 

With the new revenue stream for roads and bridges, lottery funds currently directed to MDOT would be shifted to PERS to the tune of $100 million a year. 

House leadership deserves credit, in my estimation, for thinking big. The plan not only fundamentally shakes up the tax code to remove the penalty on work, it offers a path to address two recurring problems with infrastructure funding and state retirement.

The Goal is a Good One

Nine states operate without a state income tax. Collectively, those nine states dramatically outpace national averages when it comes to population growth, economic growth, and income levels. They also have seen greater than average growth in revenue collections to fund government.

How? Bigger economies with more people yield greater consumption and higher property values, which in turn generates more revenue.

The theory of the case, played out in these nine states, is that taxing what people consume is fairer and more efficient than taxing people’s work. Taxing work creates a disincentive for productivity in the economy. Sales taxes are also broad based, meaning everyone has some skin in the game, and involve far less in administrative time and resources to collect than income taxes.

To put a fine point on it, it’s not just a question of amount of taxes. The form of taxes matters. In full disclosure, since 2015, I’ve publicly argued in favor of income tax elimination. I’m a believer it will help grow our economy and put us at a competitive advantage. But the “how” also matters.

Questions for Senate

With anything this audacious and complex, there are moving parts and serious questions that deserve real debate. The Senate, a body that has proven more cautious about committing to full income tax elimination, will have two questions to answer:

• First, can we afford it?
• Second, are they okay with some tax increases now on the promise of even bigger tax cuts in the future? 

I’ll address the first question in greater detail below. On this second question, it’s worth understanding that HB 1 front loads the offsets (increases) in full, starting July of 2026, while the cuts gradually phase in over the next 11 years. 

This means that using the House estimates, there will be roughly $550 million in new taxes collected in 2026 under the bill. On the other end of the ledger, there will be approximately $200 million in income tax cuts in 2026, as the cut passed in 2022 completes the phase down on income tax rates from 4.4 to 4 percent.

In 2027, HB 1 features a full percentage point drop in the income tax rate from 4 to 3 percent, valued at $500 million. The reduction in the sales tax on groceries will save taxpayers another $60 million or so. On the opposite end, taxpayers will collectively cough up the full $1.1 billion in estimated new taxes.

Under the proposal, the tax rate on income and groceries continues to fall, so that by 2031 (according to my calculations), the bill yields its first net cut in taxes, and by 2037, an estimated $1.1 billion net cut. 

The early imbalance of new taxes could create both a policy and political problem. But there is an obvious fix — phase in the offsets along with the cuts to ensure a net cut from the outset. Because the offsets are half of the final tally of cuts, they could be completed in half the time. 

This could look simply like adding a cent to the fuel sales tax, and 0.3 in local sales tax, annually for five years.

Can the State Afford It?

The answer to this question is “it depends on whether the Legislature prioritizes it.”

Any time tax cuts are described, people who want bigger, more intrusive government make the case that cuts will decimate government funding. But Mississippi’s own experience suggests this level of fearmongering is not justified.

In Fiscal Year 2016, the state of Mississippi received $7.892 billion in tax transfers according to the Department of Revenue. By Fiscal Year 2024, receipts were up to $10.973 billion. If you’re doing the math at home, that’s more than $3 billion in additional annual revenue (39%).

Notably, this revenue growth took place even as the state implemented multiple individual and business tax cuts, including the income tax reforms of 2016 and 2022, as well as corporate tax cuts in 2016 and 2023.

Income tax collections increased slightly during the period, even with the expansion of exempt income created by the elimination of the 3 and 4 percent brackets, and the reduction of the tax rate on all other income.

Sales and use tax revenue skyrocketed by 49 percent, even as the tax rate, itself, remained the same. This signals a fairly large expansion of incomes and our economy.

The state is currently sitting on $2.5 billion in reserves.

But government spending increased considerably during the period, as well, with new recurring commitments focused largely on education. General fund spending in FY 2016 came in at $5.672 billion. Last year, the Legislature approved a $7.892 billion budget for FY 2025.

The true story of Kansas’ tax reform years ago — the most used cautionary tale — was not one truly driven by the cuts, but by cuts coupled with massive increases in recurring spending.

Whether the state can afford the tax cuts proposed in HB 1 will most likely be a byproduct of whether legislators can restrain their spending habits. And that’s a big question.

One approach, could be to make cuts contingent on a “trigger” that restrains the growth in government spending. Triggers work by reducing taxes by any amount of revenue collected over a certain rate of spending growth.