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New faces in new places leave fate of inventory tax reform unclear

New legislative leadership does not necessarily guarantee easy victory for an old fight over inventory taxes.

That’s something on which parties from both sides of the issue agree.

Mississippi is one of nine states that still impose an inventory tax on its businesses. Arkansas is the only bordering state to still impose it, and Georgia is the only other Southeastern state that has it. The tax applies to materials, works-in-process and finished products, and is assessed at the end of every calendar year. Revenue is funneled to local governments and their school districts.

Legislation that either would have eliminated the tax immediately or phased it out over a number of years has failed in the Legislature since 2009. The past two sessions, a bill that would have offered a 20 percent credit to businesses subject to the tax each of the next five years, until the credit equaled the total tax burden, has passed the Senate but died in the House.

The bill is back this year, and has been referred to the Finance Committee. The first year the 20 percent credit would be available is 2014. Under the bill, businesses would continue to pay the annual inventory tax, and counties and municipalities would continue to receive revenue. The state’s general fund would kick in the tax credit.

“We’re not talking about eliminating it; that’s the issue,” said Jay Moon, president and CEO of the Mississippi Manufacturers Association, one of the most powerful supporters of inventory tax reform. “It’s a major impediment for us as far as attracting new businesses, particularly on the warehousing side.”

Moon added that the tax is especially harmful to small businesses that compete with larger national chains. For example, Wal-Mart can move large portions of its inventory toward the end of every year into storage, even if that storage is a trailer in its parking lot, and that inventory would not be subject to the tax. Small businesses that cannot do that instead often eliminate as much inventory as possible in an effort to lower their tax bills.

“If I’m a business and I have an opportunity to acquire, say, a lot of copper, I don’t do it because eventually it’s going to cost me money,” Moon said. “This is a chink in the armor. It doesn’t do any good to bring in a new business if two more shut down.”

MMA, Moon said, will soon start analyzing what it calls “opportunity costs” associated with the tax. “If a business is paying $250,000 in tax on its inventory, that’s money that didn’t go to expansion, investment, new hires, on down the chain.”

Moon said he’s “honestly just not sure” how the bill will fare. Finance Committee chair Sen. Joey Fillingane, R-Sumrall, did not respond to a message left on his cell phone.

Figures from the Department of Revenue reveal that in 2011, Mississippi businesses carried $870 million in taxable inventory. In its first year, the proposed legislation would offer credits worth $174 million.

As fervently as organizations like the MMA have sought to reduce or get rid of the inventory tax, the Mississippi Association of Supervisors has led the effort to keep it in place, calling it a critical revenue stream for local governments.

Derrick Surrette, MAS executive director, said his group hasn’t been “totally opposed” to the idea of the state offering inventory tax credits, because local governments would still receive their revenue.

“But we do have concerns about the overall (state) budget situation” relative to how those revenue holes would be filled, Surrette said.

Surrette is worried that could still end up affecting county budgets in the form of reduced reimbursement payments for programs like homestead exemption, which has already been cut in past budget years with additional cuts proposed by Gov. Phil Bryant in his first executive budget recommendation.

“I’m looking at the big picture because we’re dealing with real bullets here,” Surrette said. “If I knew the state could take this hit and still be able to fund reimbursements we’re owed, then that would be great. But if we’re already getting $12 million cut from homestead exemption (as proposed in Bryant’s EBR), then I’m going to need help understanding how the state can take that hit and still meet its reimbursement obligations to the counties.

“Inventory taxes are a fundamental source of revenue for counties and municipalities,” Surrette continued. “That said, it does put us at a (business recruitment) disadvantage. My hope is everybody takes a look at the revenue that would be lost and see how it would affect everybody else. Can the state afford to cut this check?”

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