Tax Threat 5: Outdated Income Tax Rate & Growing Inequality
June 2nd, 2015
The final threat to state revenue outlined in MEPC’s 5 Threats to Mississippi’s Tax System is Mississippi’s essentially flat income tax brackets, which have not been updated in 25 years. The substantial disparity in the income of wealthy households compared to middle- and low-income households should be reflected in the income tax rate. For example, a Mississippi family of four with $30,000 in annual taxable income pays the same 5% top tax rate as a family of four with $3,000,000 in annual taxable income.
Though the state’s income tax brackets have remained unchanged, the wealthiest 20% have increased their income by more than twice the rate of growth compared to middle-income earners. Recently, while the wealthiest 20% gained income, the middle and low-income earners lost income.
Mississippi’s heavy reliance on sales tax revenue inequitably burdens low and middle-income families, since a higher proportion of their incomes must be spent on taxed goods and services. An unbalanced tax system not only increases disparity, it threatens the overall tax system in the long term.
In general, income tax revenues are more effective for keeping pace with a state’s financial needs than sales tax revenues. Creating a new income tax bracket, with a 6% tax on income over $45,000 and a 7.5% tax bracket on income over $100,000, would raise approximately $109 million in additional annual revenue. It would also balance the income tax system more equitably among taxpayers.
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