Inside the income tax cut battle between House and Senate leaders

by Bobby Harrison, Mississippi Today
February 15, 2022

Numbers crunched at the state Senate's request by the Legislative Budget Office show a House income tax elimination plan would cause a huge budget hole starting in its second year.

But House leaders say those projections discount booming state revenue, and a modest Senate tax cut plan would not give taxpayers real relief at a time when state coffers are full.

The dueling tax cut proposals could provide the political battle of the year as the 2022 legislative session enters its home stretch. Republican leaders in the House and Senate both want income tax cuts, but they remain far apart on their plans and leaders from each side are criticizing the other.

The major difference in their plans is simple: The House wants a sweeping tax overhaul, and the Senate wants to take a more cautious approach.

“Tax policy should be straightforward and sustainable,” said Lt. Gov. Delbert Hosemann, the Republican Senate leader. “Basing tax structures on assumptions which will probably never occur is neither of these things.

“According to the state's budget analysts, the Senate tax cut plan is durable, it will not incur a future deficit, and it allows our state to continue to fund critical services without growing government,” Hosemann said. “If the state continues record high revenue growth, we will continue returning taxpayer money to the taxpayers.”

But Republican House Speaker Philip Gunn said: “We are not interested in a token tax reduction that returns only a portion to our citizens without eliminating it … We still believe our plan is real, conservative tax relief.”

Meanwhile, some lawmakers do not believe the state is in position to cut taxes. State Sen. Hob Bryan, D-Amory, said it is a fallacy to assume there are funds for either tax cut plan.

“We are not paying state employees, our roads are crumbling. We have not funded the schools,” Bryan said. “We don't have water and sewer. We can cut taxes and not have a functioning society. That is where we are heading now.”

The House plan vs. the Senate plan

Gunn has said eliminating the state income tax is the most important goal of his political career. To accomplish that goal, House leaders want to phase out the state's income tax, starting with major exemptions in year one that would mean most Mississippians would pay no income tax, coupled with an increase in sales taxes.

The Gunn plan, which has already passed the House, phases out the income tax, which accounts for about one-third of state general fund revenue, while increasing the sales tax on most retail items from 7% percent to 8.5% and cutting the cost of car tags in half.

The plan also reduces the grocery tax eventually from 7% to 4%. When fully enacted, the plan would result in an overall reduction in state revenue of about $1.4 billion in today's dollars — a significant amount, considering the state general fund is $5.8 billion this year.

A large part of the House proposal, though, does not go into effect unless certain revenue growth projections are met over about a decade. Some say it would take much longer than a decade to meet the revenue growth projections.

READ MORE: Speaker Gunn's plan to eliminate income tax, reduce food tax

The Senate, led by Hosemann, is proposing a much more modest tax cut that would, based on projections developed for the Senate leadership, prevent major spending cuts and would maintain funds to deal with inflationary growth and various needs facing the state.

Instead of eliminating the income tax altogether like the House plan, the Senate plan would phase out only the 4% state income tax bracket over four years. This, coupled with elimination of the 3% tax bracket effective last year, would mean people would pay no state income tax on their first $26,600 of income. The Senate plan, at the end of four years of cuts, would cost $316 million a year, plus a one-time expense of $130 million its first year for a rebate to taxpayers.

The Senate plan would also reduce the state grocery tax from 7% to 5%, provide up to a 5% income tax rebate in 2022 for those who paid taxes, and eliminate the state fee on car tags going into the general fund.

READ MORE: Senate unveils income tax cut plan, signaling battle among Capitol leaders

The House proposal passed through its chamber with bipartisan support and is now in the hands of Senate leaders. The Senate hasn't yet passed its plan, although that is expected in coming days.

What the projections say

The Legislative Budget Office projections the Senate requested about the House plan are based on assumptions from historical trends in revenue, spending and inflation. They show that by year two, the House plan would create more than a $250 million revenue shortfall, and the state would remain in the red for the next three years — requiring large spending cuts or tax increases. The projections do not go beyond five years.

The Senate projections use a revenue estimate of $6.49 billion for next fiscal year, the state's current official revenue estimate.

But House leaders, including Ways and Means Chairman Trey Lamar, R-Senatobia, say the state is set to collect far more than that, as it is on track to do for the current year.

“What I don't want to get out there is that the state can't afford the House plan,” Lamar said. “There's two easy ways we can afford the House plan. No. 1, change that estimate that the Senate is using — that we know is wrong — to the tune of about $600 million. Use actual collections instead of — I'm not going to call it a bogus estimate — but there are more,green dollars coming in that we know are there … Put $7 billion in there, and the red numbers go away at the bottom of their page.

“Or,” Lamar said, “you just leave it there, ignore the money coming in and leave it there, and we've got more than $2 billion set aside, on top of the rainy day fund. Take about $400 million to $500 million and put it aside and push it forward into these years — worst case — or we don't go spend it on a road somewhere, or you spend $1.5 billion on a road and put $400 million aside.”

But his Senate counterpart, Finance Chair Josh Harkins, R-Flowood, said: “In recent years, under conservative leadership, we stopped the irresponsible practice of using one-time money to pay recurring expenses. Right now, we have an influx of one-time federal funds from a federal government that is spending excessively. The Senate has a durable tax cut which will put more money in taxpayers' pockets and withstand any economic instability.”

READ MORE: Business leaders oppose Gunn's income tax elimination-sales tax increase

At issue in the projections developed for the Senate by the Legislative Budget Office is the impact of the House plan in the first two years. The cuts in the first two years are not dependent on growth projections to go into effect.

In the first two years of the House plan, the first $40,000 in income for a single person and first $80,000 of income for a married couple will be exempted from taxation, at a cost of $103.6 million for fiscal year 2024, which starts July 1, 2023. The cost of cutting car tag fees in half would be $187.7 million annually and the cost of cutting the grocery tax would be $103.6 million for fiscal 2024.

In addition, the state would receive $705.5 million from increasing the sales tax on most retail items from 7% to 8.5%.

House leaders question the projections

All of the revenue assumptions of both plans are based on projections made by the Department of Revenue and by the state's financial experts, legislative leaders say.

The Senate projection of the impact of the House plan on overall state revenue uses the revenue estimate adopted by the Joint Legislative Budget Committee, which includes Gunn and Lamar, and the governor, as its starting point in developing its projections. The committee and Gov. Tate Reeves unanimously adopted an estimate in December 2021 of $6.49 billion as the projection of the amount of revenue that will be available to budget in the upcoming fiscal year, which begins July 1.

Even though Lamar and other House leaders voted for that projection, they now say it leaves money on the table. The state is currently experiencing unprecedented revenue growth. The House in developing a fiscal analysis of its own plan projects an additional $1.1 million in revenue for the current year that could be applied toward the tax cut.

Lamar says he believes revenue will be strong not only for this fiscal year, but that it will remain strong in the ensuing years. Revenue collections for the current fiscal year already are $667 million above projections with five months remaining in the fiscal year. Lamar said money will be available to fund vital needs, including a teacher pay raise of more than $200 million, which has passed both chambers of the Legislature in different forms and still must be reconciled before the end of the session.

But Senate leaders maintain that even when using the House projections, it is likely that revenue will not be available during the 2023 session to fund the teacher pay raises and other spending that both sides have said they want to pass this year.

READ MORE: Mississippi tax laws place higher burden on people of color

Senate leaders say history has shown that state economic boons spurred by federal spending — such as Hurricane Katrina recovery, the Great Recession stimulus, BP oil disaster funds and now COVID-relief funding — are fleeting. They say with inflation at historic levels and other uncertainties in the economy, a conservative approach is warranted, not a complete overhaul in tax structure.

Rep. Robert Johnson of Natchez, the House Democratic leader, voted for the House plan, but does not sound sold on it, acknowledging the many needs facing the state. Johnson questioned whether the Republican majority can ultimately agree on a plan to eliminate the income tax because of disagreements in how to undertake such a massive endeavor.

“I am betting they butt heads and nobody passes anything,” Johnson recently predicted, but added that at least Gunn's plan cuts the state's grocery tax and reduces by 50% the cost of car tags, both of which he said aided poor people and working families.

This article first appeared on Mississippi Today and is republished here under a Creative Commons license.