Mississippi Lays the Foundation to Eliminate Income Tax

Mississippi Governor Tate Reeves signed legislation last month to phase out the personal income tax, part of a significant overhaul of Mississippi’s tax system. This measure aims to eliminate the tax on work, reduce sales taxes on groceries, and address critical issues such as transportation funding and the state’s Public Employees’ Retirement System (PERS). In the coming years, Mississippi will join the nine states without income taxes. The Magnolia State is now the second state with a personal income tax phase out plan, with the other being Kentucky.

Currently, Mississippi’s personal income tax rate stands at 4.4%. House Bill 1, also known as the “Build up Mississippi Act,” will reduce the state’s flat personal income tax to 3% by 2030. After that, tax collections in excess of appropriations automatically trigger additional rate reductions of up to 0.3 percentage points annually. Assuming the best-case scenario for revenue growth and spending restraint, Mississippi would eliminate its income tax by 2040 under current law.

The bill also includes an immediate 2 percentage points cut to the sales tax on groceries, reducing the rate from 7% to 5% starting July 1 of this year. Despite an increase in the gas tax, the overall package will result in substantial net savings for taxpayers.

Mississippi’s path to eliminating the personal income tax began when it joined the state Flat Tax Revolution back in 2022. A growing number of states are recognizing the competitive benefits of such a switch. That year alone, Iowa, Mississippi, Georgia, and Arizona took the leap from a progressive tax on personal income to a flat one. Former Speaker and ALEC National Chair Philip Gunn discussed Mississippi’s effort to eliminate the income tax on the Hugh Hewitt Show broadcasted live from the ALEC National Meeting in 2022. Speaker Gunn explained how Mississippi achieved this historic tax reduction and shared insights into how other states can similarly reduce the tax burden on their citizens. HB1 is an exciting continuation of these tax reform efforts.

Mississippi ranks 28th for economic outlook in ALEC’s latest Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index rankings. Over time, House Bill 1 will give the state a necessary boost to economic competitiveness, as it sits in a region that includes Tennessee, Florida, and Texas—three states without personal income taxes that are among the most competitive in the country.

House Bill 1 not only makes the state’s tax policies more competitive, but also seeks to deal with long-term retirement debt. Specifically, it creates a new hybrid plan in the Public Employees Retirement System of Mississippi. A hybrid plan combines the two types of retirement plans: defined benefit and defined contribution. Prior to this legislation, Mississippi primarily relied on the former, which promises a specific benefit to employees upon retirement. This allows for the growth of massive unfunded liabilities, when the state makes promises in the future without setting aside sufficient funds. According to the ALEC report Unaccountable and Unaffordable, Mississippi’s unfunded pension liabilities total more than $81 billion.

States can set themselves up to eliminate unfunded liabilities by switching from defined benefit to defined contribution plans, which operate in a similar fashion to 401(k) plans do in the private sector. A hybrid plan, like the one created in Mississippi, can help states reduce unfunded liabilities by providing retirees both a defined benefit and a defined contribution plan.

This plan to eliminate the state personal income tax is a historic win for Mississippi workers and a bold step forward for the state’s economy. It puts the state in a better position to compete for individuals and businesses “voting with their feet,” locating in the places that provide the greatest economic opportunity. Public pension reforms also put the state on a more fiscally sustainable trajectory for the long term. As the Governor shared on X, “What a great day for Mississippi taxpayers.”