No one really knows how Missouri became the Show-Me State, but one popular theory involves the 19th century Congressman Willard Duncan Vandiver, who told an assemblage of Navy officers, “I come from a state that raises corn and cotton and cockleburs and Democrats, and frothy eloquence neither convinces nor satisfies me. I am from Missouri. You have got to show me.” It remains, now as it was then, a fine philosophy. Hence, with several 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. reform proposals percolating in the state legislature, Missourians might well say, that all sounds good—but show me.
Show me that it makes us more competitive.
Show me that it simplifies the tax code.
Show me that it balances the budget.
Show me.
Right now, there are three separate plans, though they overlap in many of their goals. In the House, Speaker Elijah Haahr (R) filed House Bill 2540; Senator Bill Eigel (R) has another proposal, Senate Bill 617; and Governor Eric Greitens (R) has a third plan. The governor’s plan is intended to be close to revenue neutral; House Bill 2540 is an overall cut; and Senate Bill 617 has yet to receive a revenue score.
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.
Missouri’s income tax is anachronistic. It has ten rates and brackets—as many as California—but the top marginal rate kicks in at $9,072. It’s one of six states to allow taxpayers to take a deduction for federal income taxes paid, up to $5,000 (twice that for married filers). Under current law, Missouri is set to reduce its top individual income tax rate gradually from 6.0 to 5.5 percent, subject to revenue triggers which implement a reduction of 0.1 percentage point after every year in which net general revenue collections are at least $150 million higher than the amount collected in any of the prior three fiscal years.
Rates and Brackets
House Bill 2540 would reduce the income tax rate to 5.0 percent while eliminating two brackets. Senate Bill 617 would cut the rate to 5.25 percent (with the loss of one bracket) while establishing a set of tax triggers designed to bring the rate down to 4.85 percent subject to revenue availability. The governor’s approach sets the rate at 5.3 percent. If the federal government gives the go-ahead for collecting sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. on remote sales (a Supreme Court case, Wayfair v. South Dakota, is pending), Senate Bill 617 would use the additional revenue anticipated from taxing online purchases to reduce the top marginal income tax rate by another 0.3 percent, potentially bringing the rate as low as 4.55 percent.
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. and Personal Exemption
Missouri mirrors the federal standard deduction, which increased to $12,000 for single filers under the new federal tax law. It also provides a personal exemption of $2,100 per taxpayer or spouse and $1,200 for each dependent they are entitled to deduct for federal income tax purposes, which creates a quandary. The new federal law repeals the personal exemption. Missouri’s personal exemption is not identical to the federal exemption, but is based on the number of exemptions a taxpayer is entitled to take for federal tax purposes. All three bills follow the federal code in eliminating the personal exemption, while going along with the dramatically higher standard deduction.
Federal Deductibility
Missouri is one of six states which allows a deduction for federal income taxes paid, capped in Missouri at $5,000 (or $10,000 for joint filers). Federal deductibility is an anachronistic policy that ties Missouri’s tax code to federal policy in unexpected and often undesirable ways. When federal taxes go down, Missouri taxes go up. When the federal government provides preferential treatment of something, Missouri penalizes it. The cap does attenuate this effect, since the limitation kicks in below the threshold where some of the larger federal preferences would have an impact, but it represents an inefficient, distortive, and nonneutral tax offset, where slightly lower rates would be far preferable. All three proposals involve phasing out federal deductibility based on income levels.
Pass-Through Deduction
Under the new federal tax law, taxpayers may claim a deduction for 20 percent of qualified pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income, subject to certain restrictions. This policy is nonneutral and promotes tax arbitrage while doing little to create economic growth, so it is fortunate that few states conform to the federal tax code in such a way as to incorporate the deduction. Missouri, however, already has its own pass-through deduction, currently at 5 percent but slated to ratchet all the way up to 25 percent over time. The House suspends the phase-in, keeping the deduction at 5 percent. While full repeal would be optimal, preventing further erosion of revenue from this nonneutral provision is good policy.
Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
Missouri’s corporate income tax is also needlessly complex, with federal deductibility, a bevy of tax incentives, and a choice of apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. factors. All three plans propose to simplify the tax structure, broadening the overall corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. while lowering rates.
Senate Bill 617 offers the smallest reduction in the corporate income tax rate, from 6.25 to 5.25 percent. House Bill 2540 reduces the rate to 5.0 percent, while the governor’s proposal includes the most substantial rate cut, to 4.25 percent. The repeal of federal deductibility features in all three plans, as does the requirement that Missouri corporate 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. be apportioned on a single sales factor basis (meaning that it is based exclusively on the percentage of sales made in Missouri, regardless of the location of property or employees), rather than giving companies their choice of single sales factor or an evenly-weighted apportionment factor which takes payroll, property, and sales into account in equal measure.
A rate of 4.25 percent avoids an overall tax hike for corporations by fully offsetting the base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. effects of repealing federal deductibility and requiring the use of a uniform apportionment factor. The higher rates in the House and particularly the Senate bill likely leave businesses paying more, though they still improve the overall structure of the state’s corporate tax code.
Other Taxes
The Senate’s proposal would increase the state’s gas taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. , currently levied at 17 cents per gallon, to 18 cents per gallon as of July 2020, further increasing to 23 cents per gallon by July 2021. (It would increase another four cents if the state were permitted to start taxing remote sales, as part of a revenue offset to pay for a contingent 0.3 percent cut in the individual income tax rate.) All three plans would have the state enter the Streamlined Sales Tax Agreement, meant to simplify the state’s sales tax code in anticipation of the possibility of some federal authority to tax sales transacted remotely.
The House, meanwhile, would eliminate certain compensatory allowances paid to businesses which collect sales taxes or withhold employees’ taxes, along with increasing motor vehicle fees to adjust for 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. and repealing a 6 percent yield tax on forestry products. The bills make other changes as well, such as adjusting the Financial Institutions Tax rate to maintain its proportionality with the corporate income tax following a cut in the corporate rate.
Paths Forward
All three plans would improve the state’s tax structure. The governor’s plan is intended to be revenue neutral; the House plan represents a tax cut; and there is no revenue score for the Senate plan as of yet, though it is likely that it would raise taxes on corporations while reducing burdens on individuals. Each plan has its advantages and disadvantages. Together, however, they offer some credible ways forward, and hold out the prospect of an agreement which could eliminate some of the state’s anachronisms and put it on a more competitive footing.
| Current Law | H.B. 2540 | S.B. 617 | Governor | |
|---|---|---|---|---|
|
Individual Income Tax Rates |
Top rate of 6%, with annual 0.1% reductions to 5.5% subject to revenue triggers |
Top rate of 5%, while eliminating two brackets |
Top rate of 5.25% (while eliminating one bracket). Revenue triggers used to drop rate to 4.85% over time. Devotes potential money from online sales tax collections to further reductions of top rate by 0.3%, to as low as 4.55%. |
Top rate of 5.3% |
|
Standard Deduction and Personal Exemption |
Conforms to federal standard deduction, which went from $6,350 up to $12,000 for single filers (SF) as a result of federal tax reform. Personal exemption of $2,100 per taxpayer or spouse, $1,200 per dependent, linked to federal calculation. |
Repeals personal exemption, adopts higher standard deduction ($12,000 SF, $24,000 married filing jointly) |
Repeals personal exemption, adopts higher standard deduction ($12,000 SF, $24,000 MFJ) |
Repeals personal exemption, adopts higher standard deduction ($12,000 SF, $24,000 MFJ) |
|
Federal Deductibility |
Allows taxpayer to deduct federal tax liability against state liability, up to $5,000 SF, $10,000 MFJ |
Deduction phased out based on income levels |
Deduction phased out based on income levels |
Deduction phased out based on income levels |
|
Pass-Through Deduction |
Allows taxpayer to deduct 5% of pass-through income. Deduction slated to grow to 25% of pass-through income |
Freezes deduction at 5% of pass-through income |
Retains current trajectory |
Retains current trajectory |
|
Corporate Income Tax |
Rate of 6.25%. Allows for deduction of federal tax liability. Choice of apportionment formula. |
Rate of 5.25%. Repeals federal deductibility. Single sales factor apportionment. |
Rate of 5%. Repeals federal deductibility. Single sales factor apportionment. |
Rate of 4.25%. Repeals federal deductibility. Single sales factor apportionment. |
|
Other Taxes |
Gas tax: 17 cents/gal. Sales tax administration: Not a member of Streamlined Sales Tax Agreement.
|
Eliminates certain compensatory allowances paid to businesses which collect sales taxes or withhold employees’ taxes. Increases motor vehicle fees to adjust for inflation. Repeals 6% yield tax on forestry products. Joins Streamlined Sales Tax Agreement |
Increases gas tax to 18 cents/gal. as of July 2020, further increases to 23 cents/gal. by July 2021. (Would increase another 4 cents if the state were permitted to start taxing remote sales, as part of a revenue offset to pay for the contingent 0.3% cut in the individual income tax rate.) Joins Streamlined Sales Tax Agreement |
Joins Streamlined Sales Tax Agreement |