1. January 2018
Amy Blouin, Executive Director

2. Why the State Budget Matters Why does the budget matter?
• K-12: 848,000 children
• Higher Education: 177,921 students
• Child Care: 36,351 children
• Foster Care: 20,287 children
• Adoption: 22,534 children
• Mental Health: 170,000 adults and children who struggle with developmental disabilities, serious mental illness, substance abuse
• Health Care for Seniors: 80,920
• Health Care for Missourians Living with a Disability: 157,111
• Health Care for Kids & Pregnant Women: 648,942

3. How Services are Funded
Missouri’s budget is really made up of three large categories or pools of funding: State General Revenue, Federal Funding and Earmarked State Dollars:
Federal funding that comes to Missouri is largely dedicated for specific programs, for instance, Medicaid dollars must be used for Medicaid. State lawmakers have little control over federal funds.
Earmarked state dollars are ones that are generally constitutionally required to be used in certain ways. For instance, the gas tax is earmarked for transportation. Lawmakers have little control over earmarked funds because of their restrictions set in the constitution, except that lawmakers can increase funding for programs that also get earmarked funds.
State general revenue is made up of the individual and corporate income tax and most sales tax in the state. This is the area of the budget that lawmakers generally debate during the legislative session.
For the current budget year, which began on July 1st, and is Fiscal Year 2018, each of these three large pools of the budget makes up about one-third of the total state budget of $27.8 billion
The State Fiscal Year runs from July 1 – June 30th

4. How Services are Funded
Missouri’s budget is really made up of three large categories or pools of funding: State General Revenue, Federal Funding and Earmarked State Dollars:
Federal funding that comes to Missouri is largely dedicated for specific programs, for instance, Medicaid dollars must be used for Medicaid. State lawmakers have little control over federal funds.
Earmarked state dollars are ones that are generally constitutionally required to be used in certain ways. For instance, the gas tax is earmarked for transportation. Lawmakers have little control over earmarked funds because of their restrictions set in the constitution, except that lawmakers can increase funding for programs that also get earmarked funds.
State general revenue is made up of the individual and corporate income tax and most sales tax in the state. This is the area of the budget that lawmakers generally debate during the legislative session.
For the current budget year, which began on July 1st, and is Fiscal Year 2018, each of these three large pools of the budget makes up about one-third of the total state budget of $27.8 billion
The State Fiscal Year runs from July 1 – June 30th

5. How Services are Funded

6. How Services are Funded

7. Missouri has reached a point where we are unable to fund the public services that provide the foundation upon which families, communities and our economy can thrive, including as education, public health & safety and transportation. Missouri’s revenue collections have not kept pace with increasing costs of services. When adjusting for inflation, the real purchasing power of general revenue remains lower than Not only have costs risen due to inflation, but the demand for services has also increased, requiring state revenue to grow at a higher rate than inflation just to maintain existing services.
Not only have services been cut over the last decade, each year they compete against each other for more limited increases. Services for our grandparents are pitted against services for our children; and health care services for our neighbors living with disabilities are pitted against other financial supports that help seniors and people with disabilities remain independent in their own homes.

8. Corporate Tax Cuts
One of the main causes of the recent budget struggles is significant drop in, corporate tax revenue over the last two years which is directly connected with corporate apportionment changes approved in House Bills 128 (passed in 2013) and Senate Bill 19 (passed in 2015). The bills changed the way multi-state companies calculate their income for state tax purposes, and largely benefits multi-state companies that are housed outside of Missouri, but who profit from the sale of their services and goods to Missourians. The change to tax policy is largely recognized by lawmakers as a mistake.

9. Fiscal Year 2019
FY 2019 Revenue Likely $240 million short of Maintaining Current Depleted Budget
One of the main causes of the recent budget struggles is significant drop in, corporate tax revenue over the last two years which is directly connected with corporate apportionment changes approved in House Bills 128 (passed in 2013) and Senate Bill 19 (passed in 2015). The bills changed the way multi-state companies calculate their income for state tax purposes, and largely benefits multi-state companies that are housed outside of Missouri, but who profit from the sale of their services and goods to Missourians. The change to tax policy is largely recognized by lawmakers as a mistake.

10. Two Decades of Cuts
But, recent changes to the corporate apportionment formula are just a small part of the problem. In fact, Missouri’s budget struggles are not the result of short-term dynamics, but the consequence of decades of erosion which began in A series of decisions to reduce taxes were first initiated in reaction to the “Hancock Lid”, Missouri’s constitutional provision that restricts the growth of state revenue to the ratio of personal income that it comprised in Missouri did not hit the Hancock lid until the late 1990s when economic growth was exceptional. From 1995 through 2000 the state reached the Hancock lid every year, and was required to refund to taxpayers nearly $1 billion dollars. Though a significant amount of money when combined, the average Missouri family received a refund of just $40 over those five years.
But, more significant than the refunds was the dynamic that Hancock created. At the time Lawmakers started to believe that Missouri was flush with money and that the state needed to cut taxes in order to avoid the lid. This started a downward slide. Between 1993 and 2013 state lawmakers passed 20 different tax cuts which combined cost more than $1 billion per year. As a result of the tax cuts made over the last three decades, Missouri is now $4.146 billion below the “Hancock lid”. By nearly every measure, Missouri invests less today in critical public services than it did three decades ago. Not surprisingly, Missouri is well below other states in its investment in public services, ranking 43rd nationally.
Tax Cuts :
• Elimination of the general revenue sales tax on groceries ($277.6 million)
• Increase in the personal exemption from $1,200 to $2,100 ($161 million)
• Increase in the dependent exemption from $400 to $1,200 ($67.9 million)
• Sales tax exemptions ($24.5 million)
Tax Cuts approved in 2003:
• School Sales Tax Holiday ($2 million)
Tax Cuts approved in 2007:
• Exempting social security and pension income from state income tax for single individuals with incomes below $85,000 and married, combined filers with incomes below $100,000 ($145 million)
• Additional sales tax exemptions ($10.4 million)
Tax Cuts approved in 2008:
• Nonresident tax reciprocity ($7.3 million)
• MOST expansion ($7.9 million)
Tax Cuts approved in 2011:
• Phase-out of the corporate franchise tax ($126 million)
Tax Cuts approved in 2013:
• House Bills 128 (2013) & Senate Bill 19 (2015) Change in corporate apportionment ($150 - $200 million)

11. Keeping “Up” With Kansas
Unfortunately, without intervention, it’s about to get much, much worse. In 2014 Missouri’ passed the Senate Bill 509 tax cuts as an ill-fated attempt to “keep up with Kansas”. The MO cuts include many of the same provisions that the Kansas’ tax cuts included and which wreaked havoc in Kansas. But Kansas has already proven that it’s a bad idea to go down this road. In fact, since 2012 when the Kansas tax cuts were implemented, Kansas has enacted nine rounds of state budget cuts, increased the state sales tax rate, eliminated or reduced credits that help families like the home mortgage interest deduction and child and dependent care credit. Further, the state’s bond debt increased by $2 billion in the last six years, resulting in three credit rating downgrades. (SOURCE: Kansas Center for Economic Growth and Rise Up Kansas). In fact, Kansas’s tax cuts proved so devastating that in June of 2017, with strong bipartisan support, Kansas lawmakers repealed the bulk of the cuts, placing Kansas on the road to recovery. Unfortunately, Missouri is set to begin its own version of the Kansas tax cut experiment starting in Unless we take proactive steps to prevent these cuts from being implemented, we’ll soon be walking down a similar path as Kansas.

12. Comparing Missouri & Kansas Tax Cuts
Pending Cliff
Although some Missouri lawmakers claim that the SB 509 tax cuts are different than what Kansas did, a quick comparison shows that they are more alike than not. Missouri’s tax cuts may be slightly smaller, but will be just as devastating.
Comparing Missouri & Kansas Tax Cuts
Both Kansas & Missouri Cut Individual Income Tax Rates
As of 2017, Kansas cut the top rate of individual income tax from 6.45% to 4.6% for income over $60,000, and reduced all other tax brackets by somewhat smaller amounts
Missouri cut the top rate of individual income tax from 6% to 5.5% for income over $9,000
Both Kansas & Missouri Create a “LLC Loophole”
Both Kansas and Missouri enact a new deduction for businesses that file their taxes through the individual income tax structure, mainly LLCs, sole proprietorships and partnerships, effectively giving preferential tax treatment to select businesses based only on how they are structured.
Kansas eliminated tax for LLC entities
Missouri’s SB 509 would cut LLC income that is subject to tax by one-fourth
Both Kansas & Missouri phase-in the cuts over time and include a “Trigger” mechanism
In addition to the immediate reduction in of income tax rates, Kansas’s tax cuts included a “march to zero” provision that would require additional cuts to the state’s individual and corporate income tax rates if state revenue grew by more than 2.5% per year, resulting eventually in the elimination of the state’s individual and corporate income tax
Missouri’s SB 509 included a similar phase-in and “trigger” mechanism by requiring that the tax cuts be phased-in over a five year period, with each reduction in the individual income tax rate and increase in the LLC exemption contingent upon state revenue growing by at least $150 million compared to the highest level attained in the previous three years
Neither “trigger” mechanism would allow state revenue to grow enough to meet inflationary costs, let alone respond to changing demographics such as more children enrolled in school or the aging of the population. In fact, the trigger mechanisms were never really meant to provide real protection, but a false sense of security

13. Given Missouri’s already compromised state budget, making additional cuts to services will not be easy. In context, the $720 million cost of SB 509 would be the equivalent of the following cuts to the Fiscal Year 2018 state budget (all cuts are based on general revenue):
Cutting one-fifth of state funding for public schools – reducing state funding for local K-12 schools by $848 per student; or
Nearly eliminating all state funding for Missouri’s two-year and four-year public colleges and universities (97% of $740 million in FY 2018 funding); or
Nearly eliminating mental health services for 170,000 Missourians with severe mental illness or developmental disabilities who are served through the department of mental health services each year (a cut of 90% of $801 million in FY 2018 funding); or
60 times what Missouri spends on meal programs provided through the Area Agencies on Aging; or
40 times the amount of state general revenue needed to prevent the cuts to MORx in FY 2018;
15 times the amount of state general revenue needed to prevent changes to eligibility guidelines for home and community based services, nursing home care and consumer directed services that were enacted in FY 2018.

14. Though the SB 509 tax cuts disproportionately give the largest cut to wealthy Missourians, all Missourians will be impacted by cuts to services

15. Even After Tax Cuts - KS Still AHEAD of MO
The BIG difference between KS and MO – after decades of tax cuts, MO has no room to cut. In fact even after KS implemented its tax cuts, its investments in public services were higher than MO.

16. Kansas On the Road to Recovery
Another big difference, of course, is that the KS tax cuts were large and fast – Frog in the frying pan/ or water
People in local communities felt it
Significant community engagement

17. First – Prevent the Cliff
Putting Missouri
on the Road to Recovery
First – Prevent the Cliff
Repeal the Senate Bill 509 Tax Cuts before they are fully implemented
Repeal the Business Income Deduction of Senate Bill 509– Understanding the “LLC Loophole”
There is no silver bullet for fixing Missouri’s tax structure. It will take a concerted effort over time that includes implementing multiple changes. We can start by plugging holes, revising some of the changes made in recent years, and updating our tax structure. Each of the following changes would help create a more adequate, fair, sustainable, transparent, neutral and competitive tax structure.
Repeal the Senate Bill 509 Tax Cuts before they are fully implemented
The most critical first step in getting Missouri back on level footing is repeal of the 2014 tax cuts (Senate Bill 509). It’s not too late for lawmakers to take action to protect Missouri from the same fate as Kansas. Missouri’s tax cuts are only reaching the beginning of their implementation in 2018, and are expected to be phased in over multiple years. This means we can reverse the cuts before the harm becomes severe.
Repeal the Business Income Deduction of Senate Bill 509– Understanding the “LLC Loophole”
Missouri’s tax structure is increasingly picking winners and losers in the economy, and the business income deduction included in the Senate Bill 509 tax cuts will increase this dynamic.

18. Business Income Deduction
Repeal SB 509 (2014)
Business Income Deduction
The deduction benefits only select businesses that file their tax through the individual income tax, including LLCs, S-corporations, Partnerships and Sole Proprietorships. Taxes for these businesses would be cut by 25%, while Missouri families and other Missouri businesses would continue to pay tax on the majority of their income. As a result, the new exemption creates an incentive for businesses to change their corporate structure in order to avoid paying state tax.
Tax analysts across the political spectrum agree that this provision simply encourages tax avoidance by giving certain businesses an unfair tax advantage, and it does nothing to stimulate economic growth. The Tax Foundation has noted that this type of business income exemption unfairly rewards certain businesses simply for the way they are structured, and that “There is no sound economic justification for treating two types of business activity so dramatically differently”. (SOURCE: Tax Foundation Fiscal Fact, “Not in Kansas Anymore: Income Taxes on Pass-Through Businesses Eliminated,” May 29, 2012) Similarly, the Center on Budget and Policy Priorities demonstrated that the tax exemption would do little to incentivize economic growth because, “a substantial share of the profit exempted from tax…. is earned by wealthy owners of large investment funds and other business entities that have no employees.” (SOURCE: Center on Budget & Policy Priorities, “Proposed Kansas Tax Break for Pass-Through Profits is Poorly Targeted And Will Not Create Jobs,” March 23, 2012)

19. Business Income Deduction No “Shot of Adrenaline”
State
Total Employment 2005
Total Employment 2017 (July)
Percent Change
Kansas
1,392,024
1,439,519
3.41
Missouri
2,847,006
2,972,066
4.39
Unemployment Rate 2005
Unemployment Rate 2017 (July)
5.0
4.3
5.4
4.0
Private Sector Average Weekly Earnings 2007
Private Sector Average Weekly Earnings July 2017
$682
$799
17.16
$681
$822
20.70
In fact, when the Kansas tax cuts were enacted, Governor Brownback claimed they would “create a shot of adrenaline” in the arm of the economy in Kansas. But they didn’t. Instead they wreaked havoc. In fact, an array of indicators prove that the Kansas economy fell behind Missouri economy after their tax cuts were implemented.
At a minimum, Missouri should repeal the LLC Loophole created by Senate Bill 509. This provision alone will cost $267 million annually when fully implemented. Further, an estimated 58% of the benefit from the tax deduction would go to the wealthiest 1% of business owners. Those with average incomes of $1.5 million would get a $7,673 tax cut. (SOURCE: Institute on Taxation and Economic Policy, August 2017 analysis) This hardly helps the small and struggling businesses that lawmakers aimed to support with the measure. A repeal of this provision would not solve all of our problems, but would at least fix the most heinous aspect of the tax cuts.

20. State and Local Taxes as % of Income
Why Tax Policy Matters:
Fairness
State and Local Taxes as % of Income
by Income Group
Missouri’s outdated tax structure is upside down
When all state and local taxes are taken into account, the current tax structure creates a heavier burden the lower your income is.
Low-wage workers in Missouri who earn less than $53,000 per year pay 9 percent or more of their income in state and local taxes,
While Missourians earning more than $407,000 per year pay just 5.5 percent of their income in state and local taxes

21. Modernize & Level the Playing Field
Putting Missouri
on the Road to Recovery
Modernize & Level the Playing Field
Fix the corporate apportionment hole created in 2013/2015
Enact Streamlined
End or modify the Timely Filing Discount
Create a More Equitable Tax Structure
Next plug holes and modernize; beginning with fixing the corporate tax apportionment hole created in 2013/2015

22. Enact Streamlined
Additionally, there is bipartisan interest among state lawmakers to implement the Streamlined Sales Tax Collections mechanism.
Missouri and other states that rely on sales taxes to fund services like education and health have been losing sales tax revenue as a result of a failure to capture sales taxes that are owed for online retail purchases.
Streamlined is a collections mechanism that would allow Missouri to automatically collect sales taxes that are due for online retail purchases at the time of purchase in the same way that they are automatically collected for purchases made at “bricks and mortar” retailers. The measure has broad bipartisan support because it would level the playing field between Missouri’s “bricks and mortar” retailers and their online competitors and it is not a tax increase. Most Missourians don’t realize that they are supposed to be tracking their online purchases and remit sales tax to the state at the end of each year for those purchases.
Twenty-four states, including most of Missouri’s neighbors, have implemented similar legislation.
Because the issue involves interstate commerce, it requires both state and federal legislation. Upon passage of the state legislation, Missouri will collect $20 million annually in currently uncollected state sales tax. Upon passage of the companion federal legislation, which also has bipartisan support, Missouri will collect at least $350 million annually in additional sales taxes.
The state legislation has been sponsored by Senator Wallingford (Republican – Cape Girardeau); the federal legislation is supported by both Senators Bond and McCaskill

23. Revise Timely Filing Discount
Finally, we should get rid of special credits that have outlived their purpose. Missouri’s “Timely Filing Discount” allows retailers to retain a portion of the sales and use taxes they collect from customers if they remit those taxes to the state in a timely manner. This “vendor discount” is the second most generous in the country, and cost Missourians $114 million in (Source: Missouri Department of Revenue – Division of Taxation) Bringing this discount in line with other states would allow our state to make much needed investments in Missourians that would strengthen our quality of life and economic competitiveness.
Through Missouri’s Timely Filing Discount, retailers that remit sales and use taxes in a timely manner are allowed to retain two percent of the taxes collected. The discount was established at a time when companies had to manually calculate and remit sales taxes to state and local governments. However, automation has minimized the amount of time and staffing required for this function, reducing the costs for companies.
But while the cost for retailers has decreased, the size of Missouri’s vendor discount has not.
As a result, Missouri provides a discount that is well beyond what most other states provide.
• Only 28 of the 45 states and the District of Columbia that have sales taxes provide “vendor discounts,” which range from 0.5 percent to five percent of the tax collected.
• Moreover, sixteen of those states have capped the dollar amount retailers can retain, from a low of $50 per month to a high of $10,000 per year.
• In fact, with the exception of only Colorado, all states that have higher vendor discount rates than Missouri either cap the total dollar amount that companies can retain, or apply the higher rate to a limited dollar amount. For example, Georgia provides a three percent vendor discount, but only to the first $3,000 of sales tax collected.
As a result, Missouri’s uncapped timely filing discount of two percent is more generous than all other states except Colorado. (SOURCE: Data from the Federation of State Tax Administrators; Colorado’s vendor discount rate is uncapped at 3.333%, the highest in the nation)
As shown in the graphic, Missouri is out of pace with all neighboring states. Three of Missouri’s neighbors do not provide vendor discounts, and the others have capped the amount of the discount.
Further, in addition to the timely filing discount for retailers, Missouri is the only state that provides an additional payment to companies for filing employee withholding tax on time. The “timely filing discount” for employers cost Missouri $29 million in 2016.

24. Enact a Missouri EITC
To offset the increased tax rate for lower income brackets, this new tax structure would be coupled with a new Missouri Earned Income Tax Credit. The federal Earned Income Tax Credit (EITC) has long provided hardworking families the ability to achieve a better future and a pathway to the middle class. The structure of the EITC encourages people to stay working and to work more hours. Though most families receive the EITC only temporarily, it has profound long-term benefits for families and communities. Building on the demonstrated success of the federal credit, 26 states and the District of Columbia have created state EITCs that offer a credit towards state and local taxes for working families with low and moderate wages. Under a Missouri EITC – or Missouri Workers Credit, 515,000 working families with incomes up to $53,300 per year depending on family size, would receive a modest tax credit.

25. Federal Tax Cuts Adds $1.5 trillion to the federal deficit
Threats to services
Threats to EITC
Components that provide tax decreases for low and moderate income workers expire by 2027, while many of the special tax reductions for wealthy Americans do not.
As a result, severely Disproportionate impact – while most Missourians would see tax increases, very wealthy Missourians with incomes averaging $2.1 million per year would get a tax cut of $6,390
(In the initial years, those with average incomes of $1.6 million get a $48,000 tax cut on average, while the bottom 60% of taxpayers in Missouri – those with incomes averaging $31,400 per year, would get an initial decrease of $370 per year, or about $1/day)
BUT the increase in the deficit threatens to harm all Missourians due to budget reductions and cuts to basic assistance programs

26. Federal Budget Resolution What’s At Stake
Cut of 18%
Cut of 16%

27. Federal Budget Resolution
What’s At Stake