Missouri’s New Tax Cut Bill Sets the Stage for a Flat Tax Future

Missouri is on the brink of a major 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. code transformation. A Senate committee recently advanced HB 798, teeing up a vote on final passage in the Senate. This legislation would lock in a 4.7 percent flat 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. rate starting in 2026, with the potential to reduce the rate to as low as 3.7 percent over 10 years. Under current law, the graduated-rate system is slated to see reductions yielding a top rate of 4.5 percent in the coming years, subject to revenue availability.

If HB 798 is enacted, Missouri would join a growing wave of states that are rethinking how they tax personal income. But the state’s ability to maintain essential government services during economic downturns will depend on how responsibly it handles future tax cuts.

The headline feature of HB 798 is its transition to a flat 4.7 percent personal income tax rate beginning in tax year 2026. This change eliminates Missouri’s current nine-bracket graduated-rate structure, where the top rate already fell to 4.7 percent as of January 1, 2025, since the respective revenue triggers in SB 3 of 2022 were met in the previous fiscal year. Missouri’s top rate currently kicks in at $9,191 in income, so transitioning to a flat rate is not itself very difficult, with the benefit formerly conferred by lower rates instead secured through an increase in 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. . Importantly, a single-rate tax can be a good way of locking in low rates for the future.

While HB 798 implements a flat individual income tax rate structure, and its trigger mechanisms are fairly responsible, there are ways to make them better. The bill allows up to ten 0.1 percentage point rate reductions to the new flat individual income tax rate if general revenue collections grow by at least $175 million above the highest of the past three fiscal years. That means the rate could drop as low as 3.7 percent over time, as long as state revenue keeps pace.

There are better ways to structure future-looking revenue triggers. One such pathway could include using 2026 as a baseline year from which to judge future revenue growth while implementing a static growth factor, rather than using the highest of the past three years of revenue growth.

Future revenue growth would then be measured in real (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. -adjusted) terms. This provides greater certainty and a clearer revenue trajectory than relying on the highest of the past three fiscal years. Still, Missouri’s decision to use the highest of the last three years is significantly better than using just the past fiscal year, which could easily yield a tax increase as the state recovers from a recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. . A three-year lookback dramatically reduces the risk that the legislature might have to step in to avert an ill-timed rate reduction.

In addition to rate changes, HB 798 would increase the Missouri standard deduction by $4,000 above the federal level starting in 2026. This expansion is significant—it increases the amount of income exempt from taxation and will simplify filing for many Missourians who don’t itemize deductions. It also helps ensure that low-income filers are made whole in the transition to 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. .

One of the most significant provisions in HB 798 is the full exemption of capital gains income from Missouri taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. starting in 2025. This would make Missouri the only state with an individual income tax to fully exclude capital gains from taxation. States sometimes follow the federal government in taxing capital gains at a lower rate, both to reduce the burden on investment and to compensate for the fact that the gain subject to tax is not inflation-adjusted, meaning that the tax is imposed on more than the amount of gain in real terms. (A modest long-term gain in nominal terms would be smaller and might even represent a loss once adjusted for inflation.)

Unlike earlier tax cut proposals that were based on revenue forecasts (like 2023’s SB 138), HB 798’s tax reductions are tied to actual revenue collections—a meaningful improvement in fiscal responsibility.

On the national stage, HB 798 could improve Missouri’s ranking in the Tax Foundation’s State Tax Competitiveness Index, particularly in the individual income tax component. A flat rate, fewer brackets, and an expanded deduction are all policy wins for simplicity and competitiveness.

Missouri’s HB 798 is a significant step toward tax simplification and competitiveness.

The flat tax trend is gaining momentum nationwide, and Missouri lawmakers are right to identify income tax rate reductions as particularly pro-growth. Early versions of income tax-cutting legislation in Missouri raised design concerns, but with modifications made to this legislation as it has advanced, it now represents a much more sustainable approach to tax relief.

Share this article