Income and Grocery Tax Cuts With Gas Tax Increase Headed to Mississippi Governor to Sign

Mississippians will soon pay less in income and grocery taxes while paying more in gas taxes under a bill that both chambers of the Legislature have now approved and that Gov. Tate Reeves has indicated he plans to sign into law.

The final version of the legislation, House Bill 1, combines earlier tax reduction plans that the Senate and House passed earlier this year. The Senate passed an amended version of H.B. 1 on March 18 that included provisions from the upper chamber’s own tax bill, S.B. 3095.

In addition to cutting grocery and income taxes, the bill will also prevent liabilities from growing in the Public Employees’ Retirement System by reducing benefits for future employees. 

“Creating a path to responsibly eliminate the income tax while not raising sales tax and stabilizing the PERS system has been a priority for Senate leadership. We cannot discuss eliminating the State’s second-largest revenue source without addressing our $26.5 billion unfunded liability as recommended by the PERS board,” Lt. Gov. Delbert Hosemann, a Republican, said at a March 17 press conference. “Our top goal remains delivering tax relief for all Mississippians while making fiscally wise decisions.”

The Mississippi House agreed to concur with the Senate’s revised version of the legislation on March 20 by an overwhelming 92-27 vote. That same day, Rep. Trey Lamar, R-Senatobia, Rep. Karl Oliver, R-Winona, and Rep. Jody Steverson, R-Ripley, entered a motion to reconsider the legislation in an attempt to push for more immediate income tax elimination.

“Let’s end the tax on work once and for all in the State of Mississippi,” Lamar said on the House floor on March 20.

Income and Grocery Taxes Decrease

Under the amended House Bill 1, income tax rates for Mississippians who make more than $10,000 will fall from 4.4% in 2025 to 4% in 2026; the rate would drop to 3.75% in 2027 and by an additional 0.25% each year until the tax rate equals 3% in 2030. That matches the Senate’s original proposal in Senate Bill 3095.

Mississippi Sen. Josh Harkins, R-Flowood, said reducing the income tax from 4% to 3% would result in a $407 million revenue loss for the State.

Starting in 2031 under the plan, if the State’s surplus in revenue from the previous was greater than 85% of $407 million, the State will further reduce the income tax by 0.20%. If the surplus is 100% of $407 million, the State will reduce the income tax by 0.25% after 2031. The State will reduce the income tax by 0.30% if the surplus is over 115% of $407 million after 2031. The cycle could continue annually based on economic growth until the income tax is eventually eliminated, Harkins explained.

“Our plan doesn’t raise any taxes to fund this income tax cut,” he said on the Senate floor on March 18, even though the plan does raise gas taxes. “We’re going off of economic growth, and economic growth will drive how fast, how much and how long this process takes,” Harkins said on the Senate floor on March 18.

The House’s original plan would have reduced the income tax rate from 4% to 3% this year and would have lowered the rate by 0.3% each year for 10 years until the tax is gone.

“Eliminating the income tax right now is a bad idea. All of us can agree that there’s a historic level of unpredictability in Washington (D.C.) right now as it relates to federal funds. … Almost $13 billion a year of our budget comes from federal funds,” Sen. David Blount, D-Jackson, said on the Senate floor on March 18.

The grocery sales tax will decrease from 7% to 5% starting July 1, 2025, under the Senate’s version of H.B. 1 and its original version of S.B. 3095. The House’s original plan had the grocery sales tax decreasing from 7% in 2025 to 2.5% in 2036 by lowering the percentage each year until 2036.

Under the House’s original plan, municipalities could have an optional 1.5% city sales tax to receive revenue from purchases made in the municipality. That option is not in the final plan, however.

Under the final bill, the state will give institutions of higher learning 25.9% of the sales tax revenue generated from business activities conducted on campuses that are not located within the corporate limits of a municipality starting on Sept. 15, 2026.

Gas Tax

The final bill will raise the gas tax from the current 18 cents per gallon to 21 cents per gallon starting July 1, 2025. The gas tax will increase by three cents per gallon until reaching 27 cents per gallon on July 1, 2027, matching the Senate’s original proposal in S.B. 3095. 

Under the amended plan, Mississippi will adjust its gas tax every other year to reflect the percentage change in the yearly average of the U.S. Federal Highway Administration’s National Highway Construction Cost Index starting on July 1, 2029. The tax increase would not be above one cent per gallon of gas every other year. The same taxes would apply for dyed and undyed diesel fuel, the final bill says.

The State would split the extra revenue from the gas tax exceeding 18 cents per gallon so that the Office of State Aid Road Construction gets 23.25% of the revenue, the Strategic Multi-Modal Investments Fund receives 2.75% of the money, and the Mississippi Department of Transportation collects 74% of the funds under the Senate’s changes to H.B. 1.

The plan predicts that the State Aid Road Fund will go from receiving $5 million or an amount equal to 23.25% of the gas tax revenue starting on Aug. 15, 2025, to receiving $8 million or an amount equal to 23.25% of the gas tax revenue starting on Sept. 15, 2027.

Sen. Hob Bryan, D-Amory, said the needs for infrastructure, like roads, bridges, water pipes and sewer lines, “are huge and increasing.”

“We cannot fix these problems with the gas tax. The gas tax was fine when it lasted, but the day you enact the gas tax, you’re on the road to it becoming less and less viable because not only of inflation but because of increased gas mileage—and indeed there are cars with infinite gas mileage. We just can’t rely on the gas tax. We not only need federal funds, we need a large amount,” he said on the Senate floor on March 18.

The original H.B. 1 would add a 5% gasoline sales tax with expected yearly revenues of $400 million that would help fund the Mississippi Department of Transportation’s road and bridge infrastructure budget. 

Tax Revenue Diversions

The State would give the School Ad Valorem Tax Reduction Fund 2.266% of the sales tax revenue starting Sept. 15, 2025, until the total amount it deposits into the account in a fiscal year equals $42 million under the Senate’s amendments to the bill. Sales tax revenue exceeding $42 million would go to the Education Enhancement Fund.

Municipalities would receive 25.9% of the sales tax revenue generated within the city starting Sept. 15, 2025, under the plan.

The Senate plan changes the rainy-day fund diversion from 10% of appropriations to 12% of revenue starting July 1, 2025, and increases to 13% of revenue by 2030, Sen. Josh Harkins explained.

“We’re probably on the low end of the scale when it comes to states and their preparedness to meet disasters and mitigate problems, and so, we’re going to shore up our rainy-day fund by making that investment into it,” he said on the Senate floor on March 18.

The Capitol Complex Improvement District Project Fund would receive 12.6% of all sales tax revenue for business activities conducted within the city limits of Jackson starting on Sept. 15, 2026, under the legislation. The current sales tax distribution rate to the CCID project fund is 9%.

PERS

The plan will create a fifth tier in the Public Employees’ Retirement System for state employees hired on or after March 1, 2026, while terminating the Supplemental Legislative Retirement Plan for state lawmakers and Senate presidents elected after March 1, 2026. The Senate added the language from several bills pertaining to PERS that died earlier in the Legislative session.

Terminating the SLRP for certain employees would mean current legislators and Senate President Lt. Gov. Delbert Hosemann would still receive “supplemental benefits” along with regular PERS benefits.

The Senate’s language says participants in the optional retirement program, which includes employees hired between July 1, 1990, and Feb. 28, 2026, would remit up to 0.2% of the participant’s total earned compensation to PERS to the system’s expense fund to help with the cost of establishing the optional retirement program. PERS should receive about $7.5 million from participants of the optional retirement program to help pay off the $26.5 billion unfunded actuarial liability, Sen. Daniel Sparks, R-Belmont, said in a Senate Finance Committee meeting on March 17.

“Nobody talks about that liability, and that liability being $26.5 billion is something that we can’t pay today. We didn’t get in that today; it happened over 30 years, and yet we’ve continued to move in the wrong direction,” he said at a press conference following the meeting.

An unfunded liability, or pension debt, is the difference between the obligations Mississippi’s retirement system owes to current employees and retirees, which is about $60 billion, and the assets in which the system has to pay the liabilities, which is about $33.5 billion. This means that PERS has an unfunded liability of $26.5 billion and a funded ratio of about 55%; the State should be making progress toward getting the funded ratio to 100%, state policy consultant for Teach Plus and former teacher Toren Ballard told the Mississippi Free Press.

The proposed fifth tier would have half of the defined benefits as tier four and would eliminate the cost of living adjustment. It would compensate future employees by adding a percentage of the employees’ paycheck to their retirement contribution accounts, similar to a 401K account, so there is money saved up over time that makes up for the lack of the lower guaranteed monthly benefit and cost of living adjustment. In the fourth tier, employers match their employees’ retirement contributions; no such match would exist under tier five.

Fifth-tier employees would still contribute 9% of their paycheck to PERS and receive a match from their employer, but the value for each year of service is less than the fourth tier.

“Tier five is not a viable solution for reducing pension debt at PERS. The pension debt that exists right now, that is money that we owe to people who are current employees, current retirees. We don’t owe any of the pension debt to future employees that haven’t been hired yet,” Ballard told the Mississippi Free Press on March 20.

Sen. David Blount, D-Jackson, said he disagrees with creating a fifth tier for PERS and instead wants the Legislature to create a “permanent revenue stream” for the system using surpluses the state budget currently has.

“We can argue about the fifth tier all day long, but it is a fact that whatever this tier looks like, this system needs more money and it needs more money now. And the sooner we all recognize that, the sooner we can start to attack the problem. The longer it takes us to recognize that problem, the more it’s going to cost to fix it,” he said on the Senate floor on March 18.

Employees who became members of the Public Employees’ Retirement System on or after March 1, 2026, are entitled to receive a retirement allowance starting the first of the month following the PERS board receiving the member’s application under the Senate’s proposal. 

State employees who become PERS members on or after March 1, 2026, would not receive the additional annual benefit defined in the legislation unless the Legislature provides a bonus benefit for a certain year under the Senate’s revisions.

The House’s original language for H.B.1 had the State directing $100 million from the State’s lottery proceeds to go to paying the PERS Employer’s Accumulation Account until the system is 80% funded at the end of a fiscal year.

Reps. Scott, Hines: Tax Cuts Will Hurt Mississippi’s Economy

Mississippi House Rep. Omeria Scott, D-Laurel, spoke against cutting taxes on the House floor on March 20. She said the Trump administration’s looming cuts to federal funding could cause Mississippi to suffer economically since Mississippi gets two-thirds of its budget from the federal government. Mississippi would not be able to make up the difference from the federal government’s decreased allocation to the State while cutting taxes if the federal government reduces spending, she argued.

“Now, the question is, as I said to you the other day: Can you make it up? Y’all, we are the poorest state in the Union, and we cannot make it up. So instead of this what you have before you, somebody should’ve brought a bill to pause that $166 million that’s coming out of your 2022 tax cut. That’s what we should’ve been doing, and we should’ve been saying, ‘Let’s wait and see what happens,’” Scott said on the House floor on March 20.

Agreeing with Scott in a separate speech on the House floor on March 20, Rep. John Hines, D-Greenville, said educational institutions needing resources and cities with struggling infrastructure beg the Legislature to address their issues, “and we don’t get it.”

“Where are we going to make up all that from?” he asked his colleagues.

While groceries would cost less under the legislation, Hines warned that household goods like soap, toilet paper and cleaning products would go up, alongside gas prices increasing under the legislation’s proposed gas tax.