Mississippi Gov. Phil Bryant (R) recently signed what people are calling the largest tax cut in state history. The cuts will total about $415 million over the next 12 years. That's a lot, considering Mississippi's overall budget. One aspect of the measure (SB 2858) is good from a tax policy perspective: the phaseout of the state's corporate franchise tax.
The franchise tax is a fundamentally bad tax, especially in a global economy. The tax is imposed without respect to profitability. Start-ups and businesses caught in an economic downturn pay when they are least able. Although that is true with all property taxes, the difference between a property tax on business capital and a property tax on real property is plain: Business capital can be moved, and real property cannot. Again, taxing mobility in a world in which governments are competing for business doesn't work. Moreover, when you tax something you get less of it. Mississippi is in dire need of capital investment. To the extent the franchise tax inhibits capital creation in the state, it's a bad idea.
Nationwide, franchise or capital stock taxes vary significantly in the now 17 states that impose them. The bases include net worth, capital stock, capital stock plus surpluses, and personal property, with formulas tied to revenue or profits. It's complicated. It's even more complicated when large multinationals must apportion those taxes (with conflicting bases). Oddly, the tax is almost always imposed in addition to the corporate income tax, which is itself pretty complicated. Why a state would purposely impose those burdens on its business community is beyond me.
Some of my liberal friends claim that the franchise tax should be retained to ensure a measure of fairness. But business entities don't pay taxes, people do, and as with the corporate income tax, it's unclear where the incidence of franchise taxes falls. Perhaps it falls on the owners of capital in the form of lower returns. Maybe it falls on employees in the form of lower wages. Or does it fall on consumers in the form of higher prices? If it's the latter, there's nothing fair about that. So I think Mississippi has done the right thing in moving to get rid of this tax. Other states should follow its lead.
The tax cutting in Mississippi didn't stop with the franchise tax. The measure signed by the governor also significantly reduced personal income taxes. Basically, the state will exempt the first $10,000 of earnings from income tax. This will, as my friends at the Institute on Taxation and Economic Policy (ITEP) point out, skew the benefits toward the wealthy. Those making $16,000 or less will save an average of $14 a year. Those with income over $150,000 will save about $270 a year. Is that ideal? No. But letting a person making a quarter of a million dollars keep another $270 will hardly exacerbate income inequality. More importantly, the state is cutting these taxes while balancing its budget. Yes, the state is cutting services to do so, but this is not a situation in which the state is cutting a billion dollars in taxes and hoping it will make up the money somehow. If the people want more services and higher taxes, they should be electing different political leaders.