August 20, 2008
Mississippi Tax Study Commission on the Right Track Towards Reform
Tax Foundation Commends Some, Criticizes Other Recommendations
Washington, DC, August 19, 2008 - In response to the draft recommendations from the Mississippi Tax Study Commission, the Tax Foundation today applauds the Commission for taking a comprehensive look at Mississippi's tax system and hopes the final proposals will provide Magnolia State residents with a simple, neutral, transparent, and stable tax system.
In Tax Foundation Fiscal Fact No. 139, "The Right Prescription for Mississippi", Tax Foundation Tax Counsel Joseph Henchman reacted positively to some and negatively to other recommendations from the Commission.
On broadening the sales tax base but continuing to tax inputs: While the Commission creates a limited list of services to be taxed, leaving out politically powerful ones and not comprehensively taxing all services, it does not eliminate the taxation of inputs.
"Sales taxes on inputs are hidden taxes that distort decisions and increase consumer prices," explains Henchman. "Ideally the sales tax should cover all consumption and exempt all inputs to prevent double taxation."
On modifying but keeping the inventory tax: "Mississippi is one of only 15 states with an inventory tax," says Henchman. "Inventory taxes also create strong incentive for companies to locate inventory in states where they can avoid these harmful taxes. It should be eliminated."
On eliminating some unused tax credits and continually reviewing others: Responding to the Commission's recommendation to continue use of tax-based incentives, Henchman warned that state lawmakers are often tempted to lure businesses with lucrative tax incentives and subsidies instead of pursuing broad-based tax reform.
"A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state's competitiveness, by repealing all incentives and subsidies," Henchman says. "The tax code would thus be used just for raising revenue, not for picking winners and losers."
On increasing the cigarette taxes: "Mississippi should be careful not to rely on cigarette taxes as a long-term source of revenue because it puts the state in the position of relying on a tax on an activity imposed with the justification of reducing the activity," says Henchman. "Numerous studies have shown cigarette taxes to be highly regressive, with the poor bearing a disproportionate share of the tax burden."
On the elimination of the franchise tax over the next five years: Henchman praises recognition that this economically damaging tax, that hits even unprofitable firms, needs to go.
"Because many of Mississippi's neighbors still levy this tax, it would provide a regional comparative advantage," explains Henchman. "Its abolition would give Mississippi a boost, even if the revenue were made up elsewhere."
On rejecting a state lottery: "The Commission admirably avoids the siren call of a lottery," says Henchman, "which is one of the most regressive and hidden forms of taxation."
In testimony to the Commission, the Tax Foundation has emphasized that the best tax system treats all taxpayers equally while minimizing economic distortions. Henchman praises the Commission for its recommendation to improve transparency and the appeals processes in Mississippi's tax system.
"The Commission has excellent recommendations for expanding availability of budget and tax information and eliminating the conflicts of interest in the existing tax appeals process," Henchman notes. "It should be clear to taxpayers who and what is being taxed, and how tax burdens affect them and the economy."
The Tax Foundation's report on the Mississippi Tax Study Commission's draft recommendations can be found at http://www.taxfoundation.org/blog/show/23514.html.
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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To set up an interview to discuss the Mississippi Tax Study Commission recommendations, please contact Matt Moon, the Tax Foundation's Manager of Media Relations, at (202) 464-5102.
