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Key to holding the line? Growing the economy

Government services, state taxes a tough balancing act

Especially in a state where the need for government services is so great because of low per capita incomes, it is a very intricate balance between keeping taxation at a reasonable level while providing essential government services.

One largely untold story is that Mississippi has been successful in recent years in keeping the size of state government employment steady while growing the economy to create new jobs. As a result, the percentage of state government employees compared to overall employment has declined.

“In the last few years, state government is becoming less and less a percentage of the total employment base,” says State Treasurer Tate Reeves. “The state employment numbers have remained relatively constant while employment in the private sector has increased, which is a very good thing.”

Reeves says in the past five years, state government as a total percentage of employment has declined from near 24% to the current level of 21.1%. The reason for that is the state has seen an influx of almost 70,000 new jobs in the past four years, almost all of which have come from the private sector.

“That is very important,” Reeves says. “It is one of the reasons our state budget is balanced. Our state budget is balanced because we are collecting almost $1.5 billion more than four years ago. And not one individual tax rate has been raised. So we have a growing economy, more people working and more taxpayers, which leads to more income from state income taxes. The system, at least for the past five years, is working the way it is supposed to by growing economy rather than increasing taxes on those already shouldering their share of the burden.”

Reeves says while it is very important to have a public sector and provide the services the public demands, it is equally important to do it in the most efficient manner possible so as to not collect more in taxes from people across our state than is necessary.

“One hundred percent of salaries paid by state government are collected through state taxes, etc.,” Reeves says. “If those taxes were not collected by the state, I would argue those funds would be reinvested by the private sector creating new jobs.”

Over recent years, federal employment in the state has also remained steady. There are 244,000 federal, state and local employees in the state. The only government category to increase the number of jobs is local government. There are currently approximately 32,000 people employed by state government compared to the largest private employer in the state with a workforce of 12,000.

One way that Mississippi has been able to hold steady on state employment and not increase taxes is improvement in the interest rates paid on debts. Reeves says at its peak, debt service was representing 10.5% of the state’s total budget. In FY 2009, it represents 6% of the budget.

“We have gotten control of the debt burden in the state,” Reeves says. “In a roughly $5-billion general fund budget, that 4% reduction in interest has freed up $200 million in our budget for other items. That is a big deal. If we had continued on same path, $200 million more in this years’ budget would go to interest rather than education, public safety, other vital services the state government provides. I’m very proud of our efforts in managing our debt portfolio, and feel it has made a big difference in the total financial structure of the state, without question. There are still ways we can become more efficient as state government, but that is just one example where we have held the line. It has made a big difference. And not many people know about it.”

Dr. Marty Wiseman, director of the John C. Stennis Institute of Government at Mississippi State University, agrees growing the private sector job base while containing the costs of state services is a good recipe.

“With Haley Barbour administration putting the brakes on government expansion, and some successes like Toyota and several other large industries coming in, the key is expanding the tax base,” Wiseman says. “If you expand the base, government can spend more as more money becomes available without raising the tax rate on anyone if you expand the base. The trick is to expand the tax base by doing the things that industry says needs to be done.”

Comparing Mississippi to surrounding states, Wiseman thinks the state is doing a good job holding taxes at a reasonable level. Often a case has been made that the state needs to spend more on education and workforce development. If one look at per capita expenditures on education, Mississippi is near the bottom of the list. But another way to look at it is to compare the education expenditures to income levels in the state, Mississippi ranks in the top 10.

“If you look at what industry says they are looking for when locating in a state, what makes a state successful, it is a trained workforce or trainable workforce, and that takes tax money,” says Wiseman. “Sometimes I’m a little miffed. I know the importance of business. Without that there is no tax base to draw from. But when business talks about the kinds of things it will take for them to be successful, a lot of that is tied to workforce and education. But business is also against high taxes. Which comes first, the chicken or the egg? It is important to have a business-friendly environment and sometimes government is the only one that can do it, particularly with education and workforce development.”

Wiseman says the trick when in a state without a lot of wealth is to not overtax. There is a tension there about how much one can tax to make it a good business environment without actually harming business.

“I think that is what we are always looking for,” he says. “The more business and industry we get with high-paying jobs and people spending those paychecks, the easier it becomes to provide what business and industry is looking for.”

Wiseman says in comparison to some other states, Mississippi government is not much above bare bones. And there are some good efforts to manage well including a certified public management program run from training division of personnel board. Wiseman says efforts like that, to infuse state agencies with efficiencies some other states might be lacking, don’t often get noticed.

Another positive effort is the Governor’s Tax Study Commission looking at the entire array of taxes in the state. Wiseman says it is critically important to look at all of the taxes instead of piecemeal.

A good example is inventory tax, which is greatly disliked by manufacturers and retailers. But it is a vital source of income for municipal, county and school districts. If you simply eliminate inventory tax, you have to replace it with something or affect local programs including those that business and industry expect to have to be successful.

“Everyone needs to be held harmless in any change in the tax structure as Gov. Barbour’s committee looks at all facets of taxes,” Wiseman says. “Look at the whole system for ways to enhance individual and business income without cutting off revenue for a badly needed service.”

Blake Wilson, president of the Mississippi Economic Council, agrees that while the inventory tax is one of the most problematic, the fact remains that many local governments and school district are strongly dependent on the revenue from inventory taxes.

“So the key is balancing it with another revenue source with a broader application, or phasing it out over time,” Wilson says. “This is a very good example of one of the balancing act challenges because our overall tax structure must be competitive with other states.”

Contact MBJ contributing writer Becky Gillette at 4becky@cox.net.

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