When the Mississippi Legislature starts talking about tax cuts, it’s a good idea to check the math.
Whether intentionally or not, the cost is often understated.
This past week, the Senate unveiled its counterproposal to the House’s tax-cut plan. The Senate’s idea is more modest but not as modest as it pretends.
Senate leaders, including Lt. Gov. Delbert Hosemann, say the combination of tax cuts and rebates would total almost $450 million. They provide a chart showing how they arrived at those numbers over the four years until the lone phased-in portion of their proposal — the elimination of the 4% income tax bracket — is completed.
The chart, though, is misleading. It only counts the lost revenue in the year the cuts take effect, not their cumulative impact.
Example: The Senate plan would cut 1 percentage point every year for four years off the 4% tax bracket. The chart shows 1 percentage point represents roughly $46 million in foregone revenue each year. It fails to recognize, however, the compounding effect of each year’s cut. Although the chart suggests the income tax cut would cost $46 million in Year 2, the actual cost that year would be double that (the $46 million recurring reduction that began in Year 1 plus the $46 million added in Year 2). And so on.
Instead of $450 million, the four-year combined cost of the Senate plan would be more like $1.1 billion.
Though it’s disappointing that the Senate would employ fuzzy math to try to sell its proposal, at least it’s not as reckless as what House Speaker Philip Gunn and his chamber have put forward. By Gunn’s own estimate (who knows if it’s right), his plan would remove $1.5 billion a year, or almost a fourth of the state’s present budget, when fully phased in a decade from now. The Senate plan is shooting for a result that’s one fifth as large.
This year’s push for tax cuts is being fueled by the surpluses the state has lately accrued, thanks to the billions of dollars in federal coronavirus relief funds that Washington has sent this way.
The problem, though, with most parts of both plans is that they are proposing a permanent response to a temporary condition. Those surpluses are going to evaporate, but the tax cuts if enacted won’t. A year or two from now, when the extra federal help dries up or the economy goes through a recession, lawmakers will be scrambling to find the revenue to maintain essential government services.
Mississippi has seen this story before.
In 1979, during a previous healthy surplus in the state treasury, then-Gov. Cliff Finch recommended to the Legislature that it return some of the excess to taxpayers with a one-time income tax rebate of up to $110 ($450 in today’s dollars).
The Legislature, which didn’t much get along with Finch, rejected his idea and instead voted to cut the income tax and eliminate the sales tax on drug prescriptions. Rather than the one-time $40 million slice that Finch recommended, lawmakers opted for a recurring cut of more than twice that amount. Finch signed the bill but with reservations.
Less than a year later, some in the Legislature were already regretting it, as the economy and tax collections softened, leaving the state hard-pressed to fund existing programs much less take on new spending initiatives, such as carrying through on promised raises for teachers and state employees.
William Winter would succeed Finch with a mission to dramatically improve Mississippi’s public education system, including establishing public kindergartens statewide, but there was no money to do it. Winter proposed paying for the landmark Education Reform Act of 1982 by raising the severance tax on the oil and gas industry. The Legislature, influenced by the oil and gas lobby, decided instead to raise the state’s sales and income tax rates — thus reversing some of what it had misguidedly done on taxes three years earlier.
The current Senate tax relief plan borrows a page from the Finch playbook with its most prudent provision: a one-time tax rebate of up to $1,000, at a projected cost of $130 million.
Conceivably, lawmakers could just stop there and put the rest of the surplus into much-needed initiatives, such as expanding Medicaid to the working poor.
The beauty of a rebate as a means of tax relief is that it does not lock in the state for ongoing cuts. It responds to the circumstances at hand and doesn’t assume what’s going to happen down the road to state revenues.
That’s wise, because when those assumptions prove wrong, which they usually do, the corrections are not so difficult to put into place.
- Contact Tim Kalich at 662-581-7243 or tkalich@gwcommonwealth.com.
