Guest author William Waller, Jr.: a reality check on HB 1 replacing individual income tax

By: William L. (Bill) Waller, Jr.

Governor Reeves has proposed doing away with the individual income tax. If passed, this would eliminate about $1.9 billion of tax revenue annually, or more than thirty (30) percent of tax revenue to the state. Before taking such drastic action, we must first logically and deliberately determine what we need each component of government to do, and how much is needed to fund it. Then the state can look at innovative tax reform measures to fund what is required in the fairest way with user fees or flat taxes.

In terms of needs, infrastructure is at the top of the list. No other obligation of state government affects the day-to-day life of our citizens, nor the economic development of our state, more than infrastructure. And ours is in poor shape. By all accounts a minimum of $300 million a year is needed to address this issue. In its 2020 Infrastructure Report Card, the American Society of Civil Engineers rated Mississippi Roads the lowest in their report (D-).

Why HB1 cannot replace individual income tax for infrastructure needs

HB-1, the Mississippi Infrastructure Modernization Act of 2018, was passed in the 2018 Special Session and has been touted by Governor Reeves as the answer to our state infrastructure crisis. Despite its title, HB 1 provides very little funding for state roads and bridges.  This is demonstrated by a simple analysis of the five parts of HB-1.

1. $250 million emergency road fund. This is simply borrowing money against a $36 million a year gaming revenue diversion the state has been using since 1988. Emergency requests approached $1 billion. Only $37 million of the $250 million awarded for emergency repairs was designated for MDOT to use for state road and bridge needs. The bulk of the money justifiably went for local bridge needs, because of an emergency declaration closing 100 local bridges. Still, why did we wait so long to take any action?
2. $80 million from the state lottery. The lottery only began generating funding in late 2019, and full funding is phased in over four years, subject to the lottery making projections. While this is a good start, this cannot be part of a long-term solution as infrastructure funding from the lottery is subject to sunset repeal on August 1, 2028.
3. $120 million use tax (internet sales tax) diversion. This is a substantial amount of money for county and municipal road and bridge needs, but not one penny goes to MDOT for state roads and bridges. The money is derived from what is referred to as a “user fee” on internet sales. The fee is the same as the 7% sales tax collected on brick-and-mortar sales in local communities. 18.5% of sales tax collections are used to fund local governments. Local governments have been slammed by the paradigm shift to consumer purchases over the internet. In fact, internet sales exceeded brick and mortar sales in 2016. In essence, the county and city governments are now receiving internet sales tax revenue to replace funding formally provided by brick-and-mortar sales. However, the money is restricted for county bridge and road improvements only.
4. Sports betting. Up to three million a year from sports betting is designated for bridge and road maintenance. $2.3 million was paid in FY 2019, but this is subject to a 2028 sunset repeal.
5. Electric/Hybrid vehicles.  A surcharge was added to license tag taxes of $150 per year for electric vehicles and $75 a year for hybrid vehicles. On October 15, 2018, there were roughly 14,000 hybrid vehicles and 1,000 electric vehicles that together generated $1.2 million in taxes a year. Interestingly, these assessments are to be adjusted annually for inflation. Since the user fee on gasoline was set in 1987, without an inflation adjustment, the real value of the 18.4 cents per gallon revenue gets weaker every year, which is exacerbated by increased costs for road and bridge repairs. It’s also worth noting that since 1987,  Mississippi and Alaska are the only two states in the country that have not adjusted their user fee on gasoline.

Additional funding for state roads and bridges will never reach $100 million a year. The only significant money for state road and bridge needs is from the lottery, which began collections in late 2019 and stops in 2028. The only long-term additional funding for state roads and bridges that will exist after 2028 is the license tag surcharge on electric and hybrid vehicles. HB 1 is simply not a viable solution to the funding crisis currently existing for our state roads and bridges.

The proposed state income tax repeal is premature until we get our infrastructure funding in order. Reforming our state’s tax structure should be considered in the context of stabilizing funding for infrastructure to meet real needs we have, modernizing our roads and bridges, and updating the tax structure in a fair way that still funds vital government services.

William L. (Bill) Waller, Jr.

genbill_@outlook.com