BPF: tax return contains fabricated numbers
As Mississippi lawmakers work to eliminate personal income taxes, they are looking for ways to claw back the resulting reduced revenues. One possible source is the elimination of various deductions, exemptions and tax credits.
But analysis by the Bigger Pie Forum (BPF) found that the Department of Revenue’s official estimates of these deductions, exemptions and credits are largely fabricated and should not be relied upon by the state legislature.
The tax report contains fabricated numbers
For the past 10 years, and possibly longer, the DOR has simply applied an arbitrary adjustment for inflation, 2.5% in most cases, to arrive at its annual estimate of cost to the budget of the ‘State of most sales tax exemptions.
Therefore, these amounts have no current basis in reality. One wonders if they ever did.
Of the 46 sales tax exemptions for which the DOR released an estimate this year, 37 of them, or 80%, were obtained by applying the arbitrary adjustment for inflation. Over the past 10 years, 74% of its estimates have been calculated the same way, rather than attempting to determine an actual cost.
It seems that an occasional attempt is made to produce an exact number. For example, the amount of sales tax that would have been collected on drugs had they been taxed was estimated to be around $30 million per year until fiscal year 2015. In 2016, the estimate was more than five times greater than $162 million. In the years that followed, the DOR applied the arbitrary adjustment for inflation – exactly 2.5% in some years and 2.0% in others.
These estimates are part of the annual “Report on Tax Expenditures” produced by the Office of the State Economist, using data and estimates provided by the DOR. “Tax expenditures” refer to the amount of revenue the government would receive if these tax exemptions, deductions and credits did not exist. This is based on the theory, which is debatable, that not collecting a tax has the same effect as appropriating money from the public treasury.
The report acknowledges that there are certain estimates that should not be relied upon, as “no established database exists to determine these values”. It’s not clear why the DOR offers baseless estimates for some exemptions, but labels others as “not available” due to lack of data. Yet others are identified as “insignificant” (although one that was marked as insignificant for years), suddenly had a price tag of $5 million – which has since been set on the automatic inflation track of 2.5%.
Estimates of income tax exemptions, deductions and credits may be more reliable than those of sales tax, although this is not certain. These estimates are not arbitrarily adjusted as sales tax estimates are. But there are wild fluctuations in the estimates from year to year that raise questions about their accuracy.
For example, the estimated annual “cost” of the charitable donations deduction was in the $70 million range until it quintupled to $350 million in 2015 and then leveled off. the following year to $83 million.
Considering the impact of tax deductions, exemptions and credits is a legitimate function of the legislature, and it is quite possible that some of them will be repealed in order to “pay for” some of the elimination of state income tax.
But to do so responsibly, the legislature must have reasonably accurate information. The report on tax expenditures is not a reliable source and the Ministry of Revenue should not present it as such.
— Article credit to Bigger Pie Forum Editorial Board —