A couple of generations ago, Sunday dinner South would have been likely to include chicken fried in lard, mashed potatoes in cream and green beans boiled to death. Over time, most people have shifted to foods cooked in a healthier manner.
That is the analogy that the Center for a Better South director Andy Brack uses to discuss tax reform in the South. Just as there has been a shift to healthier cooking, Southern politicians need to modernize the state tax structure so it is fairer and reflective of the modern economy.
Brack said the antiquated tax structure in Mississippi and other Southern states is holding the region back. The center’s policy book, “Doing Better: Progressive Tax Reform for the American South,” written by Sarah Beth Coffey with Alan Essig, recommends that lawmakers across the South modernize their state tax codes in a holistic manner.
“Their structures have outdated tax components that need to be modernized for today’s market,” said Brack. “For example, Southern states generally started taxing incomes about 80 years ago when $12,000 was a good annual income. In some states, that’s about as high as the top bracket, which makes the income tax structure virtually flat, not progressive as it originally was.”
Fairness, adequacy and integrity
Brack says all components of the state’s tax system including the income tax, sales tax, property tax and others should be thoroughly examined and modernized to improve and ensure the fairness, adequacy and integrity. Lawmakers can better represent people across the South by restructuring state tax codes to make them more representative of today’s complex and rapidly changing economy.
The book focuses on 11 ways lawmakers can improve tax systems. It also provides scorecards for 11 Southern states, including Mississippi, that shows how each state rates on each of the 11 ideas. Mississippi scored about average, doing better than some states and worse than others.
Mississippi received good marks for modernizing sales taxes, eliminating corporate loopholes and strengthening accountability. But the state has not broadened its sales tax base, raised the cigarette tax to the U.S. average, enacted an Earned Income Tax Credit, modernized income tax brackets or dealt with hidden income tax increases.
Current tax structures in the state are heavily dependent on income tax. The top tax rate bracket in Mississippi is $10,000. Brack said while that was a good income backing the 1930s and 1940s, today $10,000 is poverty income.
“What that means is the income tax has become a kind of flat tax because brackets do not reflect the spectrum of incomes,” he said. “After $10,000, the tax is the same for everybody. If everyone is hitting the top bracket, it is not really a progressive tax. Income tax is supposed to be set up so people at the bottom end don’t pay as much as at the top end.”
Another problem is that everyone, rich and poor, pays the same percentage of sales taxes. And, there are many exemptions to sales taxes. Mississippi could be losing $500 million a year because of sales tax exemptions. Brack said if more revenue was generated by eliminating exemptions, possibly the sales tax rate could be reduced.
“What our book suggests is some of those exemptions are outdated and need to be reviewed,” he said. “Some may not work for the modern economy. Right now politicians are not looking at these exemptions and I think they should be looking at them. Then politicians have a policy choice of using new money to do new things or they could lower the sales tax rate, which is the option I personally think is important.”
A tax on groceries is considered regressive because it hurts the poor more than the wealthy. But Brack said there are pluses and minuses to considering eliminating sale taxes on groceries. But raising cigarette taxes is a no brainer.
Raising the current tax of 18¢ per pack to 92¢ per pack would reduce smoking and promote public health. Research has shown the increase in cigarette taxes would cause 17,000 adult smokers to quit. Long-term health savings from declines in smoking would save $742.1 million in health care costs.
“Taxes on cigarettes would be a regressive tax because it would hit people at the lower end of socioeconomic scale harder,” Brack said. “But long-term health savings far outweigh the regressive nature of the cigarette tax. We talked a lot about whether or not we should include this, and the idea was the health cost savings would be dramatic, and a good public policy way to be proactive affecting smoking rates.”
The Center for a Better South also recommend rethinking senior tax preferences, giving seniors a tax break based on income rather than a broad exemptions to everyone over 65.
“Mississippi needs to look at what is fairest to the most number of people,” Brack said. “We suggest giving tax breaks to seniors based solely on age isn’t fair. Essentially a better public policy would be to base senior tax preferences on means tested methods. If Mississippi keeps tax preferences based on age, the state will pay more and more money for that preference in the future, so it will tax the state. When senior tax preferences started in the 60s, they started because 35% to 40% of seniors were in poverty. Two generations later only 10% to 11% tend to be in poverty. So the reason for granting preferential tax treatment to seniors has changed. This is a perfect example of tax policy that needs to be reviewed because the fundamental foundation has changed.”
The center also recommend enacting a state Earned Income Tax Credit to help working families, connecting property taxes to ability to pay, and conducting a comprehensive performance review to boost government efficiency, save money and improve customer service.
Similar findings from Stennis
Dr. Marty Wiseman, director of Stennis Institute at Mississippi State University, said that the Center for a Better South study tracked along with what was discovered by a similar report put out by the Stennis Institute earlier this year.
“One of things they talked about is that tax burdens have shifted over time in the South,” Wiseman said. “That is a fairly normal thing. We looked at several states in the South and found the poorest among us are shouldering an inordinate amount of the tax burden. The poor and less able to pay because of the regressive nature of the tax system were paying more than their share.”
Wiseman said this isn’t an intentional effort to gouge the poor, but is due to antiquated tax systems. The Stennis Institute found that people in Mississippi making less than $19,000 per year were carrying about 20% of the budget in Mississippi.
“This finding was important because often in tight budget situation, a lot of times social programs are placed in blame,” Wiseman said. “But in Mississippi, poor people can say they are paying their share. That would be case in a state that relies significantly on sales tax.”
The Stennis Institute study also dovetailed with the Center for a Better South study in indicating Mississippi is not the worst state in the South regarding tax equity. Wiseman said some other states in the South are worse than Mississippi putting too much tax burden on the lower end of the income scale.
In a tight budget situation, it is important to look at what can be done to improve revenues. Wiseman said when you “peel back all the layers of the onion,” you find a number of outdated tax exemptions. When one part of the tax base is put off limits, others have to pick up the slack.
Putting it back together
“The lesson to be learned, and what other states have gone through, is that we may need to take the whole tax and budget process apart and examine all the parts, and then put it back together in a more equitable way,” Wiseman said.
What are the chances of meaningful tax reform in the upcoming 2007 Mississippi Legislature? Wiseman said as long as revenue projections are healthy, it is less likely that anything significant will be accomplished.
“What tends to happen when the coffers get full to overflowing again is these issues fade into the background,” Wiseman said. “Even though we have some huge expenditures facing the Legislature this year, we are part of a national trend of recovering budgets on the revenue side. So when you get into that condition, it is usually ‘leave well enough alone time’. All of us, when we have extra money in bank account, we don’t worry about cutting back. Where this will become an issue again is when budgets get tight and you trying to find every means possible to come up with new revenue without raising taxes and cutting programs. Then it tends to focus everybody’s attention on whether or not we are doing things we need to be doing to generate revenue. That is when the fairness thing comes in. Then all those issues are timely as far as being put on the table.”
Contact MBJ contributing writer Becky Gillette at email@example.com.