Mississippi made history this week as the first U.S. state, aside from oil-rich Alaska, to pass legislation aimed at phasing out its income tax. This monumental achievement marked a significant victory in trying to make America’s poorest state more competitive.
Signed into law by Gov. Tate Reeves (R-MS), the new law eliminates the income tax over the next decade, starting with scheduled cuts and, after 2030, a series of budget-driven “triggers.”
Mississippi’s income tax rate will drop in 0.25% increments, from 4% to 3% by 2030. From then on, further reductions will hinge on the state’s budget surplus. Given that Mississippi has run a series of budget surpluses in recent years, the income tax could vanish entirely by the mid-2030s.
So, how did Mississippi become such a trendsetter? The elimination of the income tax almost didn’t happen.
The first serious legislative effort to eliminate income tax came in 2022 under then-Mississippi House Speaker Philip Gunn (R).
Gunn simplified the variable tax rates into a flat 4% on income above $10,000. He saw how if almost every Mississippi household had skin in the game by paying the same proportion of income tax, it would make it easier to push for full elimination. That is precisely what happened.
Fast forward to this year, new House Mississippi Speaker Jason White (R) introduced a plan to phase out the income tax by 2037. The House proposal initially included a partial tax swap, offset by increases in gas and sales taxes.
Much more cautious than the House, the state Senate was reluctant to embrace full income tax elimination. It amended the plan with a “trigger” mechanism, tying future tax cuts to significant revenue growth outpacing spending increases.
Fair enough, you might think. “Triggers” sound sensible because they are.
Except the Senate trigger was designed, some have suggested, to never be pulled, with its insistence that revenue growth far exceeds any increases in spending.
What happened next was bizarre — and a stroke of luck for those of us intent on income tax abolition. The Senate slipped up, placing the decimal point in the bill in the wrong place. This caused what the Senate designed as a brake on tax cuts to turn out to be an accelerator.
Through a combination of conservative conviction and liberal cock-up, Mississippi ended up with a law that, provided the state avoids a budget deficit, should drive steady income tax cuts. The expectation is that Mississippi will phase out the income tax by about 2037.
It should also be pointed out that the bill raises the gas tax. Mississippi, which currently has the lowest gas tax in America, will increase it slightly, with the revenue raised being spent on specific road projects.
This means Mississippi could soon become the fourth southern state, alongside Texas, Tennessee, and Florida, not to have an income tax.
Eliminating the income tax will make Mississippi more competitive. Already in 2021, the state legislature passed a little-noticed law that deregulated the labor market through occupational licensing reform. On top of that, careful control of public spending means that the public sector in the state is no longer crowding out private sector investment the way it has historically.
MISSISSIPPI ELIMINATES STATE INCOME TAX
Mississippi has seen a steady flow of inward investment turn into a torrent, with billions of dollars of capital coming to the state in the past few months. Amazon Web Services alone unveiled a $12 billion new data center.
Recently released data from the Bureau of Economic Analysis revealed that in the first two quarters of 2024, Mississippi had one of the fastest increases in per capita output in America. Although the data are incomplete for the year, the numbers show that tax cuts and red tape reduction appear to be changing what was once the most sclerotic southern state for the better.
Douglas Carswell is the president and CEO of the Mississippi Center for Public Policy.