Gov. Mike Parson (R) has called the Missouri legislature into a special session beginning September 6th, with the goal of reducing the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. from 5.4 percent to 4.8 percent and raising the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. . An income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. reduction is a competitive move, especially in a rapidly changing tax landscape, but the legislature should aim for another competitive change at the same time: consolidating the state’s nine income tax brackets into one flat rate.
Missouri’s top rate of 5.3 percent compares relatively well to the state’s neighbors. Missouri boasts a lower income tax than Iowa, Nebraska, Kansas, and Arkansas, but falls behind Illinois, Kentucky, Oklahoma, and income tax-free Tennessee. A reduction to 4.8 percent would give the state a lower rate than Illinois and Kentucky and come in just above Oklahoma’s rate of 4.75 percent. The governor’s plan would also increase the standard deduction by $2,000 ($4,000 for married filing jointly) and eliminate the bottom income tax bracket.
Missouri already saw individual income tax movement in the 2021 legislative session, with approval of the acceleration of tax triggers that were passed in 2014. Subject to revenue triggers, the current schedule would reduce the state’s top rate to 4.8 percent in 2028 at the earliest. While speeding up the process and reducing the income tax to 4.8 percent in 2023 would certainly improve the state’s competitiveness, a move to a flat tax would provide additional benefits for residents and set Missouri even more apart from its neighbors, of which only Illinois and Kentucky have flat income taxes.
Although the consolidation of nine brackets into one might seem like a daunting task, Missouri is better positioned to make the change than many other states with graduated rates. The dollar threshold for Missouri’s top marginal rate is $8,704—low enough that most taxpayers in the state are already subject to it, allaying possible concerns about those with lower incomes seeing tax increases under a flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. . Even so, Missouri can adjust its standard deduction upward to fully ensure that low-income taxpayers are held harmless under a single-rate income tax.
Although the state income tax is already close to being flat in practicality, Missouri would see significant benefits from officially adopting a single-rate income tax. Flat-rate income taxes tend to function as a bulwark against unnecessary tax increases and provide greater certainty for individual and business taxpayers. Economic decisions are made on the margin; choices about investments, labor, or relocation will be made on the basis of the effect on the next dollar of income, not the prior ones. A competitive top marginal rate matters most for economic growth, and flat income taxes—given their “all-in” nature—not only mean a lower rate on that all-important margin, but also tend to be harder to raise in the future. Compare that to highly graduated taxes, which are more susceptible to targeted, but often economically inefficient, tax hikes.
Taxpayers seem to sense this intuitively: it seems to have been persuasive in Illinois, for instance, where voters lopsidedly rejected a constitutional amendment permitting a graduated-rate structure even though the initially proposed tax increase would not increase tax liability for the vast majority of voters. They seemed to recognize that, once the principle was established, higher rates would be established for more and more taxpayers—even setting aside the implications for the state’s economic competitiveness.
Flat taxes benefit more than just taxpayers: it is easier for a state government to forecast revenue under a flat tax, and to project the revenue effects of potential tax changes.
Several states have seen these benefits and have moved toward flat income taxes in the most recent legislative season. While only four states have ever transitioned from a graduated-rate income tax to a flat tax in over a century of state income taxes, another four have adopted legislation doing so since 2021, and Idaho is expected to join their ranks in an upcoming special session.
Missouri currently ranks 13th on the Tax Foundation’s State Business Tax Climate Index, an annual measure of the competitiveness of state tax codes. If the state reduced its top income tax rate to 4.8 percent, as the governor hopes, it would rank 11th overall. If the legislature went to a flat income tax with the current tax rate of 5.3 percent, the state would break into the top 10 of the Index, ranking 8th. Combining the two plans and creating a flat income tax of 4.8 percent would also place Missouri at 8th overall.
As Missouri legislators head into a special session, they should consider making a pro-growth change that the state is already so close to achieving: creating a flat income tax.