testimony: mississippi tax policy: options for reform (10/3)

Presentation to the Mississippi Tax Policy PanelOctober 3, 2016

Mississippi Tax PolicyOptions for Reform

Nicole KaedingEconomist, Center for State Tax Policykaeding@taxfoundation.orgwww.taxfoundation.org

TOPICS OFDISCUSSION

• State Business Tax Climate Index

• State-Local Tax Burdens• Suggestions for Reform• Setting a Path Forward

79 years

we’ve worked for

ABOUT THETAX FOUNDATION

79 years

we’ve worked for

on objectiveresearch,

data,& analysis

ABOUT THETAX FOUNDATION

79 years

we’ve worked for

on objectiveresearch,

data,& analysis

at thefederal,

state,& local levels

ABOUT THETAX FOUNDATION

79 years

we’ve worked for

on objectiveresearch,

data,& analysis

at thefederal,

state,& local levels

ABOUT THETAX FOUNDATION

79 years

we’ve worked for

on objectiveresearch,

data,& analysis

at thefederal,

state,& local levels

ABOUT THETAX FOUNDATION

79 years

we’ve worked for

on objectiveresearch,

data,& analysis

at thefederal,

state,& local levels

ABOUT THETAX FOUNDATION

STATE BUSINESS TAX CLIMATE INDEX

• Comprehensive look at state tax structures

• The how rather than the how much

• Five areas of tax:• Individual income taxes• Corporate income taxes• Sales and excise taxes• Property taxes• Unemployment insurance taxes

STATE BUSINESS TAX CLIMATE INDEX

• The 2017 Edition was released on September 28th.

• Overall: 28th

• Corporate: 12th

• Individual: 20th

• Sales: 38th

• Unemployment Insurance: 5th

• Property: 35th

STATE BUSINESS TAX CLIMATE INDEX

• Overall: 28th• 2016: 26th• Mississippi’s score from 2016 to 2017 stayed

the same, but the state fell behind by standing still. Two states moved ahead of MS.

STATE BUSINESS TAX CLIMATE INDEX

• The methodology of the State Business Tax Climate Index changed for the 2017 edition.

• The 26th ranking for 2016 is the back casted result under the new methodology.

STATE BUSINESS TAX CLIMATE INDEX

STATE BUSINESS TAX CLIMATE INDEX

Component MS TN AL AR LAOverall 28 13 32 38 41Corporate 12 22 14 40 36Individual 20 8 22 29 27Sales 38 46 48 44 50Unemp. Insu. 5 23 14 30 9Property 35 29 16 24 30

STATE BUSINESS TAX CLIMATE INDEXRECENT REFORMS

• Mississippi’s rankings do not include the impact of the 2016 Taxpayer Pay Raise Act. This bill will:

• Phase out the 3 percent individual and corporate income tax bracket

• Phase out the franchise tax

• Those changes will be included starting in the 2019 edition, released in the fall of 2018.

STATE BUSINESS TAX CLIMATE INDEXCORPORATE INCOME TAX

• Mississippi’s top rate is fairly competitive to its neighbors, but the brackets are not indexed and the rates are graduated.

• MS has one of the best NOL treatments in the nation.

• Mississippi still uses a throwback rule.

• Mississippi has a jobs credits and an investment credit.

STATE BUSINESS TAX CLIMATE INDEXINDIVIDUAL INCOME TAX

• Mississippi’s top rate is fairly competitive to its neighbors, but the brackets are not indexed and the rates are graduated.

• The state’s personal exemption and standard deduction are also not indexed for inflation.

• Mississippi has a marriage penalty.

STATE BUSINESS TAX CLIMATE INDEXSALES TAX

• Mississippi’s low rank on the sales tax component is due to two large factors: the high state-level sales tax rate and the poor sales tax base structure.

STATE BUSINESS TAX CLIMATE INDEXSALES TAX

• Sales Tax Base variables determine how the state treats five main categories:• Business-to-business transactions• Final consumer goods and services• Inclusion of services• Sales Tax Holidays• Excise taxes on specific goods

STATE BUSINESS TAX CLIMATE INDEXSALES TAX

• Mississippi includes a number of business to business transactions in the sales tax base. These include:• Farm Equipment• Office Equipment• Manufacturing Machinery• Business Fuel and Utilities• Business Leases

STATE BUSINESS TAX CLIMATE INDEXSALES TAX

• Mississippi’s sales tax base for final goods and service is narrow. The base does not include:• Gasoline• Prescription Medicines• Legal• Financial• Accounting• Medical• Fitness• Barbers• Veterinary

STATE BUSINESS TAX CLIMATE INDEXSALES TAX

• Mississippi is one of 17 states with sales tax holidays. • July: Clothing below $100• August: Firearms, ammunition and hunting

supplies

STATE BUSINESS TAX CLIMATE INDEXPROPERTY TAX

• Mississippi currently has a franchise tax, though it will begin phasing out in 2018.

• Full elimination of the tax would move MS to 20th overall and to 20th for property.

• Reducing the rate to $1.25 per $1,000 (in 2023) moves MS to 26th overall and 34th for property

STATE BUSINESS TAX CLIMATE INDEXPROPERTY TAX

• Mississippi is one of nine states that levies an intangibles tax.

• Intangibles taxes are taxes on the value of stocks, bonds, trademarks, and other intangible property.

• They are highly detrimental to businesses that own large amounts of their or other company’s stock.

STATE BUSINESS TAX CLIMATE INDEXPROPERTY TAX

• Mississippi has reduced its reliance on the intangibles tax over the years. Now, it mostly applies to branch banking deposits, but still makes the state uncompetitive.

• It discourages banks from expanding and providing capital.

• It adds needless complexity for little revenue gained.

STATE BUSINESS TAX CLIMATE INDEXPROPERTY TAX

• Combining elimination of both the franchise tax and intangibles tax would move MS to 20th overall and 9th for property.

STATE-LOCAL TAX BURDEN

• Tax burden is the portion of income that goes to taxes.

• Tax collections is amount received by state; tax burden is amount paid by residents.

• Incidence: Alaska oil taxes

• Incidence: Gasoline taxes

TAX INCIDENCESTATE-LOCAL TAX BURDEN

Corporate Tax

Shareholders

LaborConsumers

TAX INCIDENCESTATE-LOCAL TAX BURDEN

STATE-LOCAL TAX BURDENTAX EXPORTING

MISSISSIPPI, FY 2012STATE-LOCAL TAX BURDEN

• 8.6 percent

• 41st highest

• $1,909.66 (70 percent) to in-state governments and $832.46 (30 percent) to out-of-state governments.

• Mississippi residents pay more to out-of-state governments than the national average.

MISSISSIPPI, FY 2012STATE-LOCAL TAX BURDEN

• That is not concerning. It is largely related to MS’s proximity to other states. • AL: 30%

• AR: 27%

• LA: 34%

• TN: 34%

• TX: 30%

STATE-LOCAL TAX BURDENS

REFORM OPTIONS

Corporate Income Tax• Finish consolidating the 3 percent rate • Inflation index the tax brackets• Eliminate the throwback rule• Eliminate credits

REFORM OPTIONS

Individual Income Tax• Finish consolidating the 3 percent rate• Inflation index the tax brackets, standard

deduction, and personal exemption• Remove the marriage penalty

STATE BUSINESS TAX CLIMATE INDEXREFORM OPTIONS

Sales Tax• Broaden base, but

exempt business inputs• Exempt Farm and

Office Equipment, Machinery, Business Utilities, and Leases

• Expand base to include fitness, barbers, veterinary, among others

STATE BUSINESS TAX CLIMATE INDEXREFORM OPTIONS

Property Tax• Accelerate franchise tax

phase out• Waiting until 2028 is

too long• Eliminate intangibles tax• Consider reforming the

inventory tax credit

SETTING A PATH FORWARD

States that have been successful in tax reform have set out clear goals.

Where does Mississippi want to be in one year, five years, and ten years?

The first big step was taken in 2016 with elimination of the franchise tax.

MISSISSIPPICONCLUDING THOUGHTS

• A package of reforms can tremendously help Mississippi’s competitiveness.

• Cutting revenue does not have to be the only criterion. Many of these reforms can be combined to offset revenue losses.

• Setting a clear vision for reform can help frame future tax reform discussions.

Nicole KaedingEconomist

kaeding@taxfoundation.orgwww.taxfoundation.org

QUESTIONS