By: Sid Salter
How 2017 federal and 2016 state tax cuts impact Mississippians and the abilities of state and local governments to provide services based on the revenues available from future tax collections under those cuts are questions not yet fully answered.
But to make matters even more interesting, the long term impact of those federal and state tax cuts may well be significantly impacted by the outcome of a 2018 U.S. Supreme Court review of a 26-year-old ruling that the National Conference of State Legislatures predicts could have an over $26 billion impact nationally on state and local tax revenues.
How does that translate into Mississippi sales or use tax revenues at a time when traditional sales tax collections have shifted from reliable annual growth to a near flat-lining of revenues? In Fiscal Years 2016 and 2017, sales tax collections accounted for 38 percent of the state’s General Fund receipts as the State Department of Revenue collected $2.062 billion in sales taxes in FY 2016 and $2.055 billion in 2017. Twenty years ago, that percentage was 41 percent.
In 2016, Mississippi lawmakers adopted and Gov. Phil Bryant signed the “Taxpayer Pay Raise Act” – the largest single tax cut in Mississippi history. By the time the measure is fully enacted in Fiscal Year 2028, the state will be foregoing a projected $415 million per year less in tax revenues.
The ten-year tax cut is predicated on three primary strategies: Elimination of the state’s corporate franchise tax; elimination of the three percent individual income and corporate income tax brackets; and creation of an exemption of a portion of federal self-employment tax on the state tax filings of the state’s self-employed.
Supporters of the measure argued that the state tax cut would ultimately create a more business-friendly environment in the state and therefore attract new jobs and allows existing state businesses to expand. Opponents argued that cutting tax revenues would exacerbate ongoing budget cuts to education, public health, and other essential services.
State Economist Darrin Webb publicly panned the idea that over the course of the phased plan, new economic activity in the state will fill the revenue hole left by the cuts. But the proof of the wisdom or folly of the plan won’t truly be told until the phase-in of the cuts are complete.
Into that uncertainty came the 2017 federal “Tax Cut and Jobs Act” – the largest federal tax revision in decades – with the average American family projected to save $2,059 on their next tax return. There is also a 20 percent income tax deduction for most businesses and the act eliminates the alternative minimum tax on corporations.
But critics argue that tax cuts for low to middle income individuals are temporary, while tax cuts for businesses and corporations are permanent. The elimination of the Affordable Care Act is also seen as a longtime negative for paying for public health care in poor states like Mississippi.
Because state government in Mississippi helps fund local governments through sharing a portion of taxes collected, it’s important to remember that Mississippi counties heavily rely on property taxes since they don’t get a share of state sales taxes (18.5 percent of collections made within the city) as Mississippi municipalities do.
So while watching the impacts of 2016 state and 2017 federal tax cuts, Mississippi state and local governments are watching the U.S. Supreme Court for a 2018 ruling in the so-called Wayfair case. In that case, the court will review the 1992 Quill vs. North Dakota case, which held that states generally could not collect sales taxes from a seller that did not have a physical presence or “nexus” in that state.
On Jan. 12, the Supreme Court announced that it will hear a South Dakota case that could reverse the Quill decision and allow states to require all online sellers to collect sales taxes. South Dakota and 35 other states have asked the high court in South Dakota v. Wayfair to declare that the “nexus” or “physical presence” rule is outdated and punitive to bricks-and-mortar retailers at a time when Americans are increasingly doing their shopping online.
The outcome of that judicial review should be huge in Mississippi, a state in which about 38 cents of every state sales tax dollar collected is collected on sales.