Governor’s Commission Deletes Vital Tax Reform Proposals

By Jeanette Mott Oxford
Executive Director, Empower Missouri

On January 25, 2017, Missouri Governor Eric Greitens issued an executive order creating the Governor’s Commission on Simple, Fair and Low Taxes. The commission was to hold at least four public hearings and issue a final report by June 30, 2017.

The commission held several meetings at which testimony was taken, mostly in Jefferson City, and I testified for Empower Missouri and our Missourians for Tax Justice sub-committee of the Economic Justice Task Force at the May 23 meeting. The four public hearings were held in May and June, and none of these was set for an urban area.

On June 30, the commission did indeed release a final report. The report followed expectations by various political pundits, proposing that tax credits be subjected to the appropriations process, that the Low Income Housing Tax Credit Program be converted to a low interest loan program and that a lower cap be established on the Historic Preservation Tax Credit.

But a curious thing happened on the way to the publication of the final report. A draft version of a much longer commission report was leaked to the media and published by the Missouri Times newspaper on June 28. That draft included several recommendations that Empower Missouri made in our May 23 testimony and suggestions from our allies at the Missouri Budget Project as well.

Why Is Missouri’s Revenue System In Such a Mess?

On the same day that the commission’s final report was released, Gov. Greitens announced $251 million in new withholdings due to revenue shortages. This is a common story, occurring whether a Democrat or a Republican occupies the governor’s mansion, because, expressed simply, Missouri’s revenue system is a mess. There are multiple factors that have created a perfect storm for Missouri’s revenue system. Among these are:

1) The Hancock Amendments

Voters in our state helped to create our repeated budget woes by passing the Hancock Amendment in 1980. This established that total state revenues cannot exceed 5.64% of Missourians’ personal income or tax dollars have to be returned to Missouri income tax payers. (This provision was triggered more than once in the 1990’s.) A second revenue-limiting amendment was passed in 1996, forcing the General Assembly to take most revenue-producing ideas to the voters for approval.

According to the most recent audit from May 2017, we are now $4.1 billion below the point at which Hancock refunds would be triggered. We believe this is an indication that our General Assembly is not providing a maintenance of effort related to the common good in Missouri.

2) Tax Cuts

The General Assembly has repeatedly cut taxes over the past twenty years – with cuts totaling approximately two billion dollars cumulatively, according to testimony given by Jim Moody at a hearing on Senate Joint Resolution 12 on February 21, 2017.

Cutting taxes is popular, but history shows us that it does not cause prosperity to break out all over as promised. Pres. Reagan raised taxes after cutting them. The “Taxpayers Bill of Rights” cuts in Colorado had to be changed because of damage done to their state, especially educational institutions, by those cuts. The Kansas Legislature has now overturned part of Gov. Brownback’s cuts.

3) Our System Is Outdated

The General Assembly has not updated our graduated tax table since 1931 – leaving our state with an outdated, unfair and inadequate revenue system – and one that is harder to fix with every year that passes. Our top tax bracket starts at $9,000 of taxable income, a lot of money in 1931, but poverty-level in 2017. (In 2017 dollars, $9,000 equals $143,786, yet we have not adjusted our tax brackets for modern realities.)

4) Our System Is Unfair – In More Than One Way

Right now, a Missourian making less than $18,000 annually pays 9.5% of their incomes in sales, excise, property and excise taxes, while a Missourian making more than $407,000 annually pays 5.5%. This is a function of our state’s essentially “flat tax” due to lack of modernization of the 1931 progressive brackets, combined with the deduction for federal income taxes paid.

Missouri is one of only six states allowing a deduction on state taxes for federal taxes paid. The wealthiest 40 percent of Missourians receive 83% of the benefit of this tax feature (sometimes called the FIT Deduction), and the tally of funds not collected due to it in the most recent year for which we have data was nearly $600 million, according to data shared by the Department of Revenue with the Missouri State Tax Study Commission in autumn, 2016.

Improvements That Could Be Made

Taken in combination, Missouri’s voters and General Assembly have structured our state to fail to provide essential programs and services and destined Missouri governors to face withholdings repeatedly. But there are solutions that could be implemented:

We could update Missouri’s tax brackets to match modern economic realities. They are so outdated that it is almost impossible to do this while reaching even tax revenue neutrality since they are so badly out of date. Loss of revenue is apt to happen without a new higher rate for some bracket (hopefully at the top incomes) or reform of some tax feature like elimination of the FIT Deduction described above.

A state-level Earned Income Tax Credit (EITC) is one of the best ways to help these families. It is structured to reward work and to avoid “cliff effects.” It is simple to administer because it is based on the federal EITC. There are families in every Missouri county who would receive much needed help from a state EITC, and those families would also spend much of the funds received in their home counties on the basics, stimulating local economies. .

Participating in The Main Street Fairness Act (Streamlined Sales Tax) would also level the playing field between bricks and mortar businesses in Missouri and online shopping venues in other states. Many avoid paying sales taxes currently by shopping by Internet. Our Missouri stores are disadvantaged.

In Conclusion

We agree with the concluding paragraph in this July 6, 2017 editorial by the St. Louis Post-Dispatch editorial board.

Given the political influence of big tax credit recipients, those reforms aren’t likely to pass, either. Tax reform is hard work and fraught with political peril. It requires more courage than Missouri’s politicians have been able to summon.

According to the Merriam-Webster Dictionary, courage is “mental or moral strength to venture, persevere, and withstand danger, fear, or difficulty.” Fear does not have to disappear to be courageous; one just must be able to withstand it. Missouri’s General Assembly should gather the courage to undertake reality-based tax reform work as our state’s future health and well-being depends upon it.

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