Within a 24 hour period, the Mississippi House of Representatives introduced and passed a bill to repeal the individual income tax, but at a cost of massive increases in sales taxes imposed on business inputs. H.B. 1439 would phase out the individual income tax by gradually increasing the personal exemption over an undefined period of time based on a complex formula taking into account general fund revenue growth, but would leave the corporate income tax in place. If passed, any business income generated by pass-through entities such as partnerships and LLCs, as well as trusts and estates, would be exempt. The bill also would gradually reduce the sales tax on groceries from the current 7% to 3.5%, which may be the only favorable sales tax change in the bill.
The net cost to Mississippi businesses could be huge. The regular retail sales tax rate applicable to ordinary purchases of business related goods, services, telecommunications services and utilities would increase from 7% to 9.5%, placing Mississippi among the highest standard rates in the country. Manufacturers currently pay a 1.5% sales tax on manufacturing equipment and repairs, but the bill would increase that by over 160% to a 4% rate. Identical increases would apply to farm and timber industry implements, equipment and repairs, as well as technology intensive enterprises. The dairy industry also will be hit hard, rising from 3.5% to 6%. Sales taxes on vehicles including aircraft, trucks and semitrailers would increase from 3% to 5.5%. Rates applicable to sales to electric power associations would increase 250% from the current 1% rate to 3.5%, an upstream cost that will likely be passed on to consumers including business customers in the form of higher rates.
Potentially more troubling is the fact that the bill brings forward all of the sales tax statutes containing the standard industrial, agricultural, governmental and utility exemptions, as well as most income tax credits. While these provisions are unchanged in the present version, by including them in the bill all of those exemption and credit provisions are open to potential modification or elimination during the legislative process.
Notwithstanding the assumed eventual income tax elimination, H.B. 1439 is receiving considerable attention and commentary over its potential negative impact on Mississippi’s competitiveness in attracting new business and retaining existing enterprises. It is unclear what the bill’s prospects are in the Senate, but Jones Walker will continue to monitor this bill and other active legislation – including bills calling for a major overhaul of Mississippi’s tax incentives programs – impacting businesses in the state.