GREENWOOD — I’d like a tax cut. You’d like a tax cut. Who wouldn’t like a tax cut?
But that’s not the question the Mississippi Legislature should be asking itself.
It should instead be asking — with a still sluggish revenue picture and a host of underfunded critical needs — whether it is responsible to give a self-interested public what it would like to have.
The answer is no, and the reason is simple. The state can’t afford to lose any more revenue.
Lt. Gov. Tate Reeves and other Republican supporters of a package of tax cuts — estimated to be worth $575 million annually when fully phased in 15 years from now — will argue that my premise is wrong. They will say that the proposed cuts to income taxes, the elimination of the corporate franchise tax and a tax break for the self-employed will grow the economy and, thus, produce more revenue for the state than the tax reductions will cost.
“These dollars are going to come back in other forms,” Senate Finance Chairman Joey Fillingane said last week before the measure easily passed that chamber.
This is the same fallacious argument that Republicans have been making since Ronald Reagan lectured the nation on the Laffer curve during the 1980s and preached that cuts in tax rates would almost always produce increases in tax revenues.
There is, however, scant support from economists — both conservative and liberal — to back the claim. Most agree that unless a tax rate is oppressively high, the growth spurred by a tax cut is not enough to make up for the loss in revenue.
Tax-cut proponents will pull out historical charts that they claim prove the opposite. They will show times when tax rates were cut and tax revenues rose, and vice versa. The problem with their charts, though, is they don’t account for the inevitable ups and downs in the economy that occur independently of tax rates. When recessions hit, tax revenues go down, and when the economy expands, tax revenues go up — no matter what’s happened on tax policy. And even if tax rates stay the same, in most normal times, tax revenues will increase simply due to inflation.
This 30-year-old myth that tax cuts will produce more tax revenue has gotten the federal government in trouble as well as several states. Louisiana is a recent example. It cut taxes when it was flush with hurricane recovery money and enjoying an energy boom, then saw its treasury tank when the Great Recession hit followed by a huge drop in oil prices. Louisiana lawmakers just completed a special session to increase taxes in an effort to undo the damage, but the state is still looking at a budget gap of hundreds of millions of dollars next year.
Although reducing taxes on personal income is a certain net loser for Mississippi’s treasury, cutting corporate taxes that discourage investment has a better chance of paying off. Thus, Reeves may be justified for trying to phase out the corporate franchise tax, a tax that only a few states have and which penalizes Mississippi-grown companies over those that are based outside the state. Unfortunately, the state has been awarding such gargantuan giveaways to a handful of big, mostly foreign-owned companies that it has left itself little cushion to eliminate the unfair franchise tax.
Mississippi is a poor state with huge needs. It spends less per student and pays teachers less than almost anywhere else in the country. It has deferred maintenance on roads and bridges so long that it now needs at least an extra $350 million a year just to begin catching up. Its Medicaid budget has exploded not because the state has been generous in extending benefits to the working poor but because many of the even poorer are just learning that they should have been getting the government-provided health insurance all along. Add the federal court mandate to repair a severely broken foster-care program, and there is just no room for making mistakes when it comes to jiggering with the state’s revenue stream.
The problem with most conservatives is that when they talk about the Laffer curve, they only look at the right side of the model — the half that illustrates how excessive tax rates will produce lower tax revenues. They neglect the left side of the graph that predicts insufficient tax rates will do the same.
Mississippi is not a high-tax state, particularly when it comes to income taxes. If it eliminates the 3 and 4 percent tax brackets, as Reeves proposes, the extra $350 a year that most wage earners will get won’t generate anywhere close to $350 in additional sales or other taxes. It will produce a tiny benefit for the individual, less than $1 a day, but a multimillion-dollar hole for the state.
It would be so much wiser to avoiding digging that hole in the first place. Just ask Louisiana, which is struggling mightily to crawl out of one.
Kalich is editor and publisher of The Greenwood Commonwealth.
