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Move to dump franchise tax back by popular demand

By TED CARTER

Mississippi may be about to give a 10-year test to a key fixture of politically conservative fiscal thinking – that revenue lost by lowering taxes on business will be more than offset by new business spending.

The idea of enhanced revenue, or at the least no-net-loss — may become central to a 2016 legislative debate over phasing out the state’s franchise tax, a levy on capital assets of all businesses, including banks and insurance companies. If supporters, whose numbers include Gov. Phil Bryant, Lt. Gov. Tate Reeves and Republican House and Senate leaders, win passage of a 10-year phaseout of a franchise tax, the action will become one more fiscal test for tax cuts in Mississippi.

And it will be a huge test.

The franchise tax, a levy of $2.50 per $1,000 of capital assets, brought the state more than $260  million in fiscal 2015. The 10-year phaseout is designed to limit the shock to the state’s treasury and give businesses time to expand and for more businesses, including mega-employers, to come in from out of state.

“The idea,” said Mississippi Manufacturers Association President and CEO Jay Moon, is that “you absorb the loss of taxes to the general fund through new businesses coming in and expansion….”

Remove the detriment and good things happen, Moon said in explaining the renewed push against continuing the tax.

A large consortium of Mississippi business groups will join in the second try to scrap a tax they say hampers growth of the state’s homegrown businesses and turns off companies elsewhere in the United States and abroad that are looking for a place to set up shop.

“It principally makes us non-competitive against other states that have no franchise tax or a limited one,” Moon said.

What Mississippi has is a franchise tax that is “wide open” in its application, he said.

The $2.50 assessment is put on each $1,000 of either the value of the capital invested or the assessed value of property held in the state, whichever is greater, Department of Revenue spokeswoman Kathy Waterbury said in an email.

It drew more than $81 million out of the manufacturing sector in fiscal 2015, $42.5 million from the financial, insurance and real estate sectors and $41.4 million from wholesale and retail trade, according to the Department of Revenue.

Agriculture paid the least in franchise taxes in fiscal ‘15 at more than $3 million, while the services sector paid $39.5 million, public utilities $23 million, mining $13 million and construction $5.9 million, the DOR says.

Mississippi is already a testing lab for over $300 million in tax cuts Gov. Bryant has signed into law over the past four years.  The largest of these is a reduction in the tax on business’s inventory, which is estimated to cost the state’s general fund $126 million for the fiscal year that will start July 1.

Bryant notched another sizable first-term tax-cutting victory by persuading legislators to limit how the DOR calculates income taxes for multi-state companies. The cost: $100 million annually, according to the DOR.

The impact of most of the legislation passed during the past four years is unknown — meaning Department of Revenue officials so far are unable to estimate the impact it would have on state revenue collections, reported Bobby Harrison of the Northeast Mississippi Journal, a sister paper to the Mississippi Business Journal, in a mid-November article.

The impact should become clearer in the years ahead as state revenue reports come in. Early estimates are for marginal growth in revenue, with collections  this year projected to rise 1 percent. A 1.5 percent rise is projected for 2016, state economists said at the state’s revenue estimating conference in November.

Bryant, Reeves and other GOP legislative leaders say dumping the franchise tax will result in more money to spend and eventually increase state revenue collections.

State Sen. David Blount, a Jackson Democrat, gave a much different assessment in an interview this week. “State tax revenue this year is not meeting projections,” he said. “We could be faced with mid-year budget cuts.”

Those cuts would come in a year that Mississippians are counting on new spending on transportation, mental health and education. Those priorities would end up in the “unmet needs” file, Blount said.

“Ultimately, we have to balance the budget,” he said.

That makes abolishing the franchise tax “imprudent at this time,” Blount said, adding he heard no mention of the franchise tax from constituents as he campaigned door-to-door this year for re-election.

Rep. Jeffrey Smith, a Tupelo Republican and chairman of the House Ways and Means Committee, said he thinks 2016 will be different from 2015 when a fiscal note that eliminating the franchise tax would carry a $500 million cost over the next four years dissuaded legislators from acting. “We just didn’t feel like on the tax side we could carry the franchise-tax-elimination relief.”

Momentum has turned the other way since then to give hope “we’ll keep something alive” in the way of getting rid of the tax, said Smith.

In the Senate, helping to abolish — or at least revamp — the franchise tax will be high on the to-do list of the Finance Committee, said its chairman, Joey Fillingane. The Sumrall Republican described the tax on capital as a levy that comes after the business “has already been taxed” on money it has made.

Taxing businesses on the balances on their books makes the state uncompetitive for businesses “and puts us at an economic disadvantage,” said Filingane, an attorney.

“It is really an outdated form of tax,” he added. “I think Republicans and Democrats want to get rid of it.”

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