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Chapter 4 introduces several important concepts that can be used to evaluate a tax system and examines some key characteristics of Mississippi’s set of taxes in order to answer the question, “How does one evaluate a tax system?”

How Does One Evaluate a Tax System?
Many different factors can be used to evaluate a tax system. There is no “set standard” of factors; however, there is general agreement that some of the most important elements include:

• Adequacy: A tax system is considered “adequate” if it collects enough revenue to pay for the services that policymakers approve for the support of all residents.
• Fairness: The main area of thought on tax fairness is the “ability to pay principle.”  Based on this principle, taxes are categorized into three types:

1. Progressive: A tax system is progressive if individuals with higher incomes pay a greater percentage of their incomes in taxes than do those with lower incomes;
2. Proportional: A tax system is proportional if all people, regardless of income, pay the same percentage of their income in taxes;
3. Regressive: A tax system is regressive is people with lower incomes pay a higher percentage of their income in taxes than those with higher incomes.

• Transparency: A tax system’s transparency indicates whether or not information about that tax system is easy to obtain.

In summary, “healthy tax systems” generate enough revenue to pay for services, collect taxes based on one’s ability to pay and are transparent.

Evaluating Mississippi’s Taxes
Mississippi’s tax system has some progressive elements and some regressive elements.  Based on Chapter 4’s analysis of the three factors listed above, as a whole, Mississippi’s tax system is regressive.

Mississippi’s Personal Income Taxes Are Regressive
In Figure 1, below, the top 1% of income earners (individuals earning an average of $806,700) pay the lowest percentage of their income toward state and local taxes, paying an estimated 6.3% of their income. The bottom 20% of earners (who earn an average of $9,100) pay 10.8% of their income and the next 20% of earners (with average earnings of $19,000) pay 10.7% of their income.  At the same time, the middle 20% of earners (individuals earning an average of $31,600) pay 10.8% of their earnings.

Sales Taxes Are Regressive
Mississippi relies heavily on the sales tax to generate revenue. Our state’s sales taxes are regressive because low-income working families pay a higher proportion of their incomes on those taxes than people with higher incomes. Furthermore, Mississippi’s sales tax is more regressive than in other states because it taxes groceries—an item that low-income working families cannot avoid purchasing.

Our Tax System Lacks Transparency
Currently, our state offers a number of corporate tax breaks.  These different tax breaks are also called tax expenditures. Tax expenditures are usually less visible than other types of public spending, which makes it more difficult for policy makers and the public to evaluate them.

Want to Know More?
Mississippi’s personal income tax functions more like a flat tax. This is due to the fact that people earning $30,000 a year are in the same tax bracket as people earning $300,000 or $3,000,000 a year. Readers can learn more about the more or less proportional nature of Mississippi’s personal income tax on page 14 of the text.

Did you know that Mississippi’s working families with wages below the federal poverty line are still subject to the state income tax? You can read more about this in Chapter 4 and on our Policy Matters Blog.

Still Want More?
Take a look at the rest of the text by following this link. Stay tuned for the next blog in this series which will outline three crucial steps for becoming involved in the budget-making process.

Author: Francinia D. McKeithan, Policy Analyst/ SFAI Policy Fellow