The Mississippi House of Representatives is considering new legislation that would eventually eliminate the income tax in the Magnolia State. House Bill 1439, also known as the Mississippi Tax Freedom Act of 2021, recently passed the House Ways and Means Committee.
With state legislatures convened throughout the nation, many elected officials have turned their sights towards state revenue and budgets. Legislative sessions have been particularly unique following the coronavirus-related downturn and an unprecedented number of special sessions that were called to address struggling state economies throughout the nation.
This has resulted in many legislatures and governors advocating for unreliable and harmful economic policies, such as increases in income taxes and minimum wage hikes. Bucking this trend is Mississippi’s HB 1439, which would gradually abolish the state income tax. Thus far, HB 1439 is one of the best economic policies to come out of states in 2021.
The Mississippi Tax Freedom Act would reduce the amount that Mississippians pay in state personal income taxes, eventually phasing it out over a 10-year period. This move would incentivize Mississippians and small business owners to remain in the Magnolia State, instead of relocating to places like Florida or Texas, which already have no state income taxes.
Inversely, high state income taxes motivate productive residents to move to other states with more favorable tax codes, which means these wealthy taxpayers transport their income, capital, and tax revenues with them.
Examples of this phenomenon have occurred in New York and other states with excessive state income tax burdens. Many of these states are experiencing mass exoduses that are only increasing due to the fallout surrounding the COVID-19 pandemic and accompanying lockdown orders from mostly Democratic leaders. According to the U.S. Census Bureau, net domestic out-migration from 2010 through 2019 saw 1.4 million leaving New York; 912,000 deserting California; and 865,900 fleeing Illinois.
Moreover, the always rosy revenue projections from higher tax rates have fallen short in states where they have been imposed. Relying on a steep income tax rate with a small base is historically unreliable and can lead to large budget deficits. It is evident that lawmakers in the Mississippi Ways and Means Committee understand this economic fallacy when they voted to push HB 1439 through the committee.
The eradication of the state’s income tax will make Mississippi a top-flight contender in the battle royale of competitive tax codes across the nation. House Bill 1439 would likely spur Americans to move to Mississippi, effectively expanding the tax base and adding to the Magnolia State’s growing economy.
The move to defang Mississippi’s income tax could not be better timed. According to Wallethub, Mississippi experienced a 12.8 percent increase in unemployment from December 2019 to December 2020, due primarily to the coronavirus pandemic. Cutting the personal income tax rate and enticing small businesses to the state will mitigate the rise in unemployment due to the ongoing pandemic.
Personal income and corporate tax hikes are generally considered to be the most destructive economic policies because they deter production, stifle innovation, and retard investment. Recent studies show states with no income tax or with low income tax rates perform better economically while facilitating population growth and job creation.
As aforementioned, high income taxes discourage economic development by dissuading high-income earners and new capital from moving into a state. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.”
States with high tax rates grow more slowly than states with lower taxes, after considering for other control factors. A ranking of all states by their overall tax burden ultimately shows that real personal income grows more on average in the states with the lowest state and local taxes as a percentage of income.
Keeping all of this in mind, it would behoove the Mississippi Legislature to carefully consider all of the positive economic growth that would likely occur after the elimination of the state’s income tax. As the coronavirus pandemic recedes, tax hikes are not a viable economic solution, particularly increased income taxes. All states should follow the lead of House Bill 1439 instead of turning to flippant, unreliable tax hikes.
For more information about state income tax and the associated economic effects, visit us here.
