State revenue slows as phase-in of income tax cuts begins

Mississippi tax collections have taken a downward trend during the first quarter of the new fiscal year as the state has collected $18.9 million or 1.02% less than what was collected during the same time last year.

The slowdown comes during the first year of the phase-in of the largest tax cut in state history.

According to the revenue report recently released by the staff of the Mississippi Legislative Budget Committee, the state collected $1.83 billion between July 1 and Sept. 30. The slowdown in collections comes on the heels of unprecedented growth in recent years.

But the slowdown, unless it gets much worse, should not impact the state budget for the current fiscal year. The reason it will not have an impact is despite unprecedented growth in recent years, legislative leaders and Gov. Tate Reeves have adopted revenue estimates not reflective of that growth.

The official revenue estimate represents the amount of money available for the Legislature to appropriate for the dozens of state agencies, for local school districts, for higher education and other state services.

If revenue collections fall short of the estimate, state leaders either have to dip into reserve funds or make cuts.

But during the first three months of the current budget year, collections are $85.8 million or 4.9% above the estimate, despite revenue being below the amount collected last year.

Mississippi, like most states, experienced unprecedented revenue growth following the COVID-19 pandemic as millions of dollars in federal relief funds poured into the state.

Revenue grew a record 15.9% for the fiscal year beginning July 1, 2020, through June 30, 2021, followed by 8.1% growth the next year and 4.4% growth last year.

Throughout those years, revenue estimates were much lower than actual growth, meaning that the money was not used for appropriations that year. Instead, the revenue exceeding the estimate was used in the following year by the Legislature primarily for capital projects, such as building and tourism projects throughout the state.

Through the first quarter, sales tax collections, the largest single source of revenue, were up $28.4 million or 4.2% over the previous year. But income tax collections, the second largest source of revenue, were down $65 million or 10.3%. The slowdown in income tax collections is occurring during the first year of a four-year phase-in of a $525 million cut in the state income tax.

The use tax collections, a 7% tax or items purchased out-of-state such as via internet sales, were up $11.5 million or 12.6%.

A key in the collections during the first three months is that revenue from sources other than tax sources, such as interest earnings, was up $21.6 million or 45.6%.

The slowdown in collections comes in the midst of campaigns for governor and legislative seats. And the slowdown comes as legislative leaders and Gov. Reeves, who is seeking re-election this November against Democrat Brandon Presley, work on developing a budget proposal for the Legislature to consider during the 2024 session starting in January.