Missouri Tax Policy Options Dylan Grundman Institute on Taxation & Economic Policy February 15, 2018

Background: State/Local Tax Codes are Regressive Taxes as share of income by income group As this graph shows, that is the case in Missouri. The lowest-income 20 percent of the population pays an overall state and local tax rate of about 9.5 percent of their income, while the highest-income 1 percent pay much less, only 5.5 percent. This is called “regressive,” and Missouri’s overall state and local tax structure is a little better than middle-of-the-pack as far as regressivity. Our tax inequality index ranks Missouri 30th most unfair. Tax changes enacted in 2014 will eventually worsen this if allowed to take effect. 2

This regressive pattern results from the interaction between personal income taxes, sales and excise taxes, property taxes, and other taxes. A more detailed look at the major Missouri taxes shows a pattern that is similar to what we see in most states. The personal income tax is the one “progressive” tax in the mix, meaning the effective rate increases as incomes increase. The sales tax and other consumption taxes are sharply regressive in all states, and that drives a lot of the overall regressivity shown in the prior slide. The property tax is fairly proportional across most of the income spectrum, but is slightly regressive overall, largely due to taxes paid by businesses and landlords that are passed on to customers and renters.

Background: Federal Tax Cuts This graph shows the effects of the most extreme version of an income-to-sales-tax shift: completely eliminating the personal income tax and replacing the revenue with a sales tax rate increase. On average, the lower 80 percent of Missourians would see tax increases while the top 20 percent would receive tax cuts. And in order to do so, the state sales tax rate would have to more than double, increasing by more than 7 cents to about 11.35 percent.

Background: State-Level Effects of Federal Tax Cuts This graph shows the effects of the most extreme version of an income-to-sales-tax shift: completely eliminating the personal income tax and replacing the revenue with a sales tax rate increase. On average, the lower 80 percent of Missourians would see tax increases while the top 20 percent would receive tax cuts. And in order to do so, the state sales tax rate would have to more than double, increasing by more than 7 cents to about 11.35 percent.

Current Options Eliminates top PIT rate (5.9%) Cuts remaining PIT rates Limits Fed Income Tax Deduction 20% non-refundable EITC This graph shows the effects of the most extreme version of an income-to-sales-tax shift: completely eliminating the personal income tax and replacing the revenue with a sales tax rate increase. On average, the lower 80 percent of Missourians would see tax increases while the top 20 percent would receive tax cuts. And in order to do so, the state sales tax rate would have to more than double, increasing by more than 7 cents to about 11.35 percent.

Current Options Cuts top PIT rate to 5.3% Limits Fed Income Tax Deduction 20% non-refundable EITC This graph shows the effects of the most extreme version of an income-to-sales-tax shift: completely eliminating the personal income tax and replacing the revenue with a sales tax rate increase. On average, the lower 80 percent of Missourians would see tax increases while the top 20 percent would receive tax cuts. And in order to do so, the state sales tax rate would have to more than double, increasing by more than 7 cents to about 11.35 percent.

Current Options New Rate structure with top rate of 7.75% at $1m Eliminates Fed Tax Deduction $20k cap on other deductions $150 per-person credit This graph shows the effects of the most extreme version of an income-to-sales-tax shift: completely eliminating the personal income tax and replacing the revenue with a sales tax rate increase. On average, the lower 80 percent of Missourians would see tax increases while the top 20 percent would receive tax cuts. And in order to do so, the state sales tax rate would have to more than double, increasing by more than 7 cents to about 11.35 percent.