Barbour's Tax Panel Missed a Golden Opportunity
October 15, 2008
William F. Shughart II
The commission appointed by Gov. Haley Barbour earlier this year to undertake a comprehensive study of Mississippi’s tax structure pulled its punches. Rather than championing much-needed root-and-branch reform, the commission’s draft report, issued on Aug. 15, recommended a few tweaks to a tax code that long has placed the state at a competitive disadvantage in attracting new businesses, creating jobs and spurring economic growth.
This first in a series of five columns evaluates the assumptions made and methods used by the Tax Study Commission in formulating its preliminary policy proposals. Wednesday, Thursday, Friday and Sunday columns will address the most important of the commission’s recommended tax reforms, including those affecting state and local sales taxation, tobacco taxes, taxes on Internet and mail-order purchases and personal and corporate income taxes.
In fairness, the governor’s charge to the commission hamstrung it from the outset on two critical aspects of its work. First, whatever reforms it put forward were to be “revenue-neutral.” A proposed increase in any one state tax had to be offset by cuts in others, so that at the end of the day total tax collections remained unchanged. The requirement of revenue-neutrality precluded the commissioners from considering the bold, across-the-board reductions in taxes that truly would brighten Mississippi’s economic future.
Ironically, complying with the governor’s instructions also prevented the commission from thinking about reforms that would in fact raise the total revenue Mississippi collects every year. Beginning with the so-called Kennedy round of tax cuts in the early 1960s, history has proved time and again that reductions in taxes on ordinary income and capital gains, especially at the upper end of the tax rate schedule, produce more revenue because, among other things, less effort is devoted to tax avoidance. It is thus not unreasonable to think that total state tax revenue could be increased if Mississippi lightened the burden on taxpayers overall. But the governor took such a possibility off the table.
Keeping tax revenue constant meant that the commission could not possibly fulfill the governor’s charge to recommend reforms that would be “pro-growth and pro-job creation.” An unchanged total tax burden will not get Mississippi out of 50th place on state rankings of positive socioeconomic indicators or out of first place on rankings of negative ones. Trading lower business taxes for higher taxes on individuals, or the reverse, is economic-development neutral as well as revenue-neutral.
Second, other than asking the commission to ensure that the state’s tax code continues to generate “sufficient revenue to fund state government at necessary and appropriate levels,” the governor instructed the commission to ignore government spending. Quite plainly, though, the revenue and expenditure sides of the state budget are closely linked; it is a well-accepted principle of public finance that one should not be considered in isolation from the other.
In essence, the governor instructed the commissioners to assume that state spending is both necessary and appropriate at its current level. By doing so, he blocked the commission from identifying areas of budgetary fat that offer opportunities for reducing spending and taxes.
As a matter of fact, the commission did find significant waste in the Mississippi State Tax Commission itself. According to the IRS, Mississippi may not be collecting as much as $120 million a year owed under existing tax law. The reason? The MSTC’s outmoded information and record-keeping systems enable many taxpayers not to report their tax liabilities truthfully and others not to file tax returns at all.
The $120 million “lost” by the MSTC every year is as much as the total revenue yielded annually by Mississippi’s sin taxes on alcohol and tobacco.
Focusing on fostering a “business-friendly environment” rather than a market-friendly one led the commission to be much too complacent about the state’s current tax structure. Although the total tax burden on Mississippians places it in the middle of the pack both regionally and nationally, important policy recommendations should not be based, as the commission did, on simple—and often misleading—comparisons of tax rates across states.
Mississippi ought to pursue an aggressive pro-growth agenda, cutting taxes and reducing burdensome regulations, no matter what other states do.
William F. Shughart II is a Senior Fellow at The Independent Institute, Frederick A. P. Barnard Distinguished Professor of Economics at the University of Mississippi, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.