Missouri Legislators Pass First Income Tax Cut in Over 90 Years

Passing both sides of the General Assembly by a wide margin, new tax legislation would make some major changes to the state code over the next decade and cost $700 million annually when fully phased-in. The plan would:

• lower the individual income tax top rate from 6 percent to 5.5 percent over ten years and reduce the number of brackets from ten to nine (the rate would go down an additional one-half percentage point if Congress enacts the Marketplace Fairness Act),
• reduce the corporate income tax rate from 6.25 percent to 3.25 over the next decade,
• enact a 50 percent business pass-through income deduction between 2014 to 2018, and
• increase the personal income tax deduction for low-income individuals in 2014.

Unfortunately, this doesn’t get at the real problem with the Missouri individual income tax: it’s incredibly complicated. There are no less than ten brackets and the top rate kicks in at only $9,000. We’ve suggested earlier that the state could easily change the system for the better by simply flattening the brackets:

Missouri’s rather absurd income tax brackets…are a relic of 1931, when $9,000 was a lot of money (equivalent to $136,000 today). Missouri might be better off junking everything but that top rate, since most taxpayers are probably in the top bracket anyway.

Isn’t it time for the state to bring its code in line with the current economy, rather than one that’s more than 80 years old?

Further, isn’t a ten year phase-in period a little bit long? Governor Jay Nixon (D) has expressed concern over the state’s ability to fund public services with less revenue. Though I fully support responsible tax changes that don’t cut a state’s revenue stream short, reducing the individual rates one-twentieth of a percentage point (three-tenths for the corporate income tax) each year for a decade is moving at a glacial pace. The bill even dictates that rate cuts are contingent upon revenue increase requirements, meaning that funding shortfalls aren’t possible.

I don’t think the Governor has any reason to worry. In fact, he should push for a less underwhelming individual income tax reform.