Missouri Senate Passes Problematic Income Tax Cut Plan

Missouri’s state Senate this week passed a $621 million tax 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 brackets which lack any inflation-adjustment mechanism.

This plan is quite similar to the house plans, although it does not lower the individual income tax by as much as HB 1295 would have, and does include inflation-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:

Full text of the bill and legislative information can be found here.

Read more on Missouri here.

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