Missouri’s state Senate this week passed a $621 million 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. cut including a 0.5 percentage point income tax reduction and a special carveout to deduct up to 25 percent of business income. We recently wrote about tax cut proposals passed by the Missouri House of Representatives, critiquing them (much like last year’s proposals) as offering only marginal improvements in income tax rates while relying heavily on special carve-outs with few economic benefits. These plans do not tackle the major structural issues in Missouri’s income tax code such as its numerous income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. which lack any inflation-adjustment mechanism.
This plan is quite similar to the house plans, although it does not lower 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. by as much as HB 1295 would have, and does include inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. -indexing. As such, it represents an even more incremental, marginal change. Our previous commentary applies as much to it as to other proposals, namely, that these bills don’t get at the real problem of numerous complex tax brackets in Missouri’s individual income tax, phase in at a glacial pace, and include large, distortionary carve-outs for business income.
As we suggested last year, Missouri might be better off eliminating everything but the top rate, since most taxpayers are probably in the top bracket anywhere. Such a plan would simplify and flatten the tax code, give a tax cut to every taxpayer, and avoid any criticism of regressivity.
Below is the proposed schedule of individual income tax rate reductions if revenue thresholds are met:
|
Bracket |
Current Tax System (2014-2016) |
Proposed 2017 |
2018 |
2019 |
2020 |
2021 |
|
>$0 |
1.5% |
1.5% |
1.5% |
1.5% |
1.5% |
1.5% |
|
>$1,000 |
2.0% |
2.0% |
2.0% |
2.0% |
2.0% |
2.0% |
|
>$2,000 |
2.5% |
2.5% |
2.5% |
2.5% |
2.5% |
2.5% |
|
>$3,000 |
3.0% |
3.0% |
3.0% |
3.0% |
3.0% |
3.0% |
|
>$4,000 |
3.5% |
3.5% |
3.5% |
3.5% |
3.5% |
3.5% |
|
>$5,000 |
4.0% |
4.0% |
4.0% |
4.0% |
4.0% |
4.0% |
|
>$6,000 |
4.5% |
4.5% |
4.5% |
4.5% |
4.5% |
4.5% |
|
>$7,000 |
5.0% |
5.0% |
5.0% |
5.0% |
5.0% |
5.0% |
|
>$8,000 |
5.5% |
5.5% |
5.5% |
5.5% |
5.5% |
5.5% |
|
>$9,000 |
6.0% |
5.9% |
5.8% |
5.7% |
5.6% |
Full text of the bill and legislative information can be found here.
Read more on Missouri here.
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