By Ed Sivak

The governor’s office projects that state revenue estimates will fall $1.2 billion short of what the state needs this year. This means that Mississippi will have significantly less money than in past years to educate children, train the workforce and maintain the roads and infrastructure that foster economic development.

The magnitude of the crisis requires a balanced approach that includes raising revenue to keep the state from moving backwards. Three revenue raising recommendations offer a starting point for helping to solve this problem. The recommendations would produce much needed funds while allowing Mississippi’s tax structure to keep pace with advancements in the global economy.

First, modernize Mississippi’s sales tax to reflect today’s purchasing habits. The sales tax was designed during the Great Depression to provide the state with revenue based on what people bought. Back then, people spent most of their money on things, rather than services. In recent decades, however, the share of spending that households devote to goods has declined. And what households spend on services -- many of which didn’t even exist during the Depression -- has increased. The shift not only costs the state money, it also sets up some imbalances that work against middle-income people. For example, if one buys a lawnmower in Mississippi to cut his or her grass, they pay sales tax on the purchase. If one pays a lawn service, he or she does not pay the tax.

Recognizing this, the Mississippi Tax Study Commission, appointed by Governor Barbour in 2008, recommended adding additional services to the list of what is taxable. The recommendation included 21 items ranging from tanning services to pet grooming. Taxing the 21 items would generate $80 million annually.

Second, update the personal income tax. Mississippi’s tax brackets are the same as they were 25 years ago back when a family could live on $30,000 a year. Today, a family of four with two children that makes $30,000 a year is in the same tax bracket as a similar family earning $1 million a year.

Recent income trends call into question the current tax brackets. According to the Center on Budget and Policy Priorities, over the last two decades, Mississippians with incomes above $117,000 have experienced over twice the rate of income growth as middle income families earning $40,000. A well-structured income tax system would take into account the trends. By adding a new state income tax bracket of 6 percent on taxable income of over $45,000 (roughly that of a household with a little over $64,000 a year in total income for a family of four), Mississippi would generate approximately $64 million.

Third, update Mississippi’s Corporate Income Tax. Given the link between the personal income tax and the corporate income tax, Mississippi’s corporate income tax could also be updated. Estimates from the Institution of Taxation and Economic Policy show that a new 6 percent bracket on corporate taxable income over $45,000 could raise approximately $55 million annually in Mississippi.

It’s important to note that these revenue recommendations only cover part of the anticipated gap in forthcoming years. There will also be budget cuts. That’s the point of a balanced approach it recognizes that no one strategy is enough to solve a problem this big and that relying too heavily on spending cuts hurts the economy, hurts working families and limits the state’s ability to move forward when prosperity returns.
Sivak is the director of Mississippi Economic Policy Center.
Copyright (C) 2010 by the Mississippi Forum 4/10