2. Why the State Budget Matters
Missouri’s population is around 6 million people.
More than 2 million of them are represented on this picture. Not to mention the parents of school children, children of aging parents, or those of us who drive cars, ride bikes, or use public transportation.
Each of our 6 million individual lives are touched, every day, by our state budget and the taxes we pay to fund it.

3. FY 2019 State Budget
The state budget is roughly 1/3, 1/3, 1/3, from Fed, State and Dedicated Revenue.
It’s important to remember that the amount of federal funds we receive is often contingent upon how much state funding we match it with.
The ’dedicated’ category includes mostly dedicated sales taxes like the conservation fund and road fund. They’re still state-generated revenues, but the legislature can’t modify this spending due to constitutional constraints.

4. How Services are Funded with State Dollars
The primary sources of state revenue are individual income tax and sales and use tax.
The first graph shows how balanced Missouri is in terms of where we get our revenue from when you include ALL state-generated revenue and not just the amounts the legislature can play with, which is called GENERAL REVENUE.
However, Nearly three-fourths of general revenue comes from individual income taxes, while one quarter of state general revenue comes from sales and use taxes.
ONLY 3 percent of general revenue is collected through corporate tax.
When changes are made to individual income tax or sales tax they can have a significant impact on Missouri’s ability to fund services that benefit all Missourians.

5. Decades of Bad Tax Policy Have Created an Imbalance and are Impeding Economic Growth
Over the last few decades, Missouri has started to rely more and more on sales taxes and individual income taxes.
The result is a tax system that is out of balance in terms of who pays for the way our government operates, but it has also caused us to lag in terms of economic growth.

6. Missouri’s Tax System is Unfair
Need to updated with new ITEP Who Pays info – 10/17
In addition to our reliance on sales and personal income tax, our personal income tax is relatively flat.
The top rate is applied at only $9,000/year, meaning anyone who makes minimum wage or higher pays the same tax rate as someone who makes $1 million dollars per year.
With each new corporate tax giveaway and loophole, the percentage that lower-income people have to pay goes up.
TG: I reworded the first couple sentences slightly. The plain bold statement re: giveaway/loophole/% is unclear

7. Corporate Loopholes & Giveaways Cost Missouri
JJL NOTES – CAN WE ADD TO THE TOP OF THIS GRAPH THE TAX CUTS THAT WERE PASSED IN 2014, 15, 16, 17, AND THEN THE EVENTUAL PHASE-INS OF THE INCOME TAX CUTS?
FROM AMY - The additions (I think) would only be:
SB 509 from 2014 – which, when fully implemented will cost $720 million/year
HB 2540 from 2018 – which, when fully implemented will increase revenue by $59 million/year
Corporate tax cut from 2018 – which when fully implemented will decrease revenue by $28 million/year
FROM TRACI: I added in SB 509, but not the 2018 cuts – don’t want to count the decrease but not the increase
Also changed the title of that image, as well as the title of the slide itself
Starting in the early 90s when the economy really started to turn around and the state was seeing revenue surpluses, the legislature started to enact incremental tax cuts and corporate loopholes.
As individual pieces, it doesn’t seem like much, but when taken as a whole, it amounts to more than $1 billion.

8. Two Decades of Cuts
Do we have updated numbers on this? The auditor has a report that shows in FY 2017 we were $4.2 billion under the Hancock Lid - Amy
Another way of showing that is to look at Missouri’s Hancock lid.
In the 80’s Missouri enacted a constitutional provision that caps how much revenue growth can happen before the state must issue tax refunds to tax payers.
With the state starting to get surpluses in the 90’s, the legislature enacted tax cuts and implemented tax credits.
As a result of Missouri’s tax policy, we are now more than $4 billion below the conservative growth caps placed in the early 80’s.

9. Wonder if this should be updated to incorporate info from Lindsey’s comparison report? - Amy
Where does this lost revenue come from?
In Missouri it has come from cuts to:
Medicaid patients
Children who are victims of abuse and neglect
College Students
Senior Citizens
Working Parents
And others
So, we’re $4 billion below the tax lid, which we know cuts directly into budgets that serve these folks. How much would people stand to gain if our tax system were more fair?

10. FY 2019 State Budget
Again, when you think about how we’re $4 billion below the caps set in the 80’s, this pie should be much larger. And if it were, you can see where those resources would go.
37% of $4 Billion is $1.48 Billion for our schools.
That’s another $360 million for mental health services.
TG: Do you want to add the additional money to the labels in this slide? Or include the info in a table in an additional slide after this?
i.e: Mental Health 9%, $360 million

11. FY 2019 State Budget
And then, don’t forget that many services get a federal match. So for every state investment, comes additional federal investments, thus growing this overall pie as well.

12. Keeping “Up” With Kansas
Missouri’s problem is that we have been enacting these bad policies, little by little, over the years.
The Kansas situation was more abrupt because it happened all at once.
The Kansas legislature enacted sweeping tax changes in response to their “cliff-diving” approach to tax policy recently after overwhelming public support.
While Missouri has some constitutional restrictions that make this change more difficult, we need to start coming up with solutions before we become like the frog in the frying pan that slowly dies over time.

13. Comparing Missouri & Kansas Tax Cuts
How are KS & MO Tax Disasters Similar?
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 Created 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

14. 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.

15. Missouri has a long-simmering budget crisis that is caused by an unfair & unbalanced tax system
TG: Changed this font to match text only slide earlier in PPT
In order to reverse the trend, we MUST go directly to the source: our state’s tax policy. Otherwise service areas will continue to fight one another for the same dollars.
This is what finally happened in Kansas and was what created the Rise Up Kansas Movement.

16. 2018 Legislative Session Personal Exemption – Passed
LLC Loophole – Partially Passed
Corporate Apportionment – Passed
EITC – Did not pass
Streamlined Sales Tax (Wayfair Fix) – Did not pass
While Kansas sprang into action, Missouri’s constitution forces us to fix our mistakes over a much longer period of time. And given the current political climate, it’s tough to take bigger bites each year.
However, Progress was made in the 2018 legislative session.
Predictably, the legislature started with a series of massive tax cut proposals
$1-$6 Billion each.
With the help of advocates across the state, eventually we were able to include some good stuff in bills that passed:
language to clarify an issue created with federal tax reform. If the personal exemption language didn’t pass, it would have cost $440 million.
LLC Loophole – LLC’s are allowed additional tax deductions other individuals are not allowed. Kansas completely closed their loophole and Missouri lowered their cap from 25% to 20%. There is additional interest in continuing to eliminate this loophole.
Corporate Apportionment. Missouri allowed out of state corporations to choose how they paid their taxes, offering them benefits in-state businesses didn’t get. We closed this loophole last year.
The EITC – what we’re calling the ‘State Work Credit’ now, almost passed before it was stripped from the bill at the last minute by Sen. Eigel.
Streamlined was ready to pass and then SCOTUS indicated they would make a ruling that would help guide the states on this issue and so the legislature tabled it until the upcoming year.

17. House Bill 2540 HB 2540 - TAFP - May 18 2018 GENERAL REVENUE IMPACT
Phase-out deduction for federal taxes
$390,000,000
Income Tax Rate Cut from the current 5.9% to 5.5%
($381,600,000)
Reduces LLC/Pass-Through Deduction from 25% to 20% (SB Tax Cuts )
$51,000,000
Clarifies that Missouri’s personal exemption is eliminated as a result of the federal tax law (prevents the loss of $440 million by eliminating vagueness in the state statute and the interaction with federal statute)
GENERAL REVENUE IMPACT
$59,400,000
For those interested in the numbers, here’s how the House bill broke down.
The state gained nearly $400 million for phasing out the deduction of federal taxes based on income. Previously, the deduction largely benefited wealthy Missourians. Now it is targeted at middle income folks and the change saves the state a significant amount each year.
We also gained $51 million by reducing the LLC Loophole from %.
Partially because Hancock doesn’t allow Missouri Lawmakers to raise taxes above a certain threshold, and also because of political realities, these adjustments were met with personal income tax rate reductions.
In the end, the bill will generate almost $60 million in additional revenue each year.
Also, it won’t show up on a balance sheet because it was fixed before it was implemented, but there was an additional language change that MBP saw that needed to happen that could have resulted in the loss of $440 million if not fixed.

18. Impact of Corporate Tax Cut on State General Revenue
Original Proposal
Rate of 3.5%
Approved Bill
Rate of 4%
Corporate Tax Collections Estimated for FY 2019 – Current Rate of 6.25%
$331 million (net)
Cut in Corporate Tax Rate
($ million)
($ million)
Apportionment change – adjusted for drop in corporate tax rate
$ million
$ million
Net Corporate Tax Revenue FY 2019
$ million
$ million
Net Impact Compared to Current Law
($ million)
($ million)
The Senate focused on corporate tax cuts and passed a measure eventually passed SB 884
The bill generated an additional $90 million (we suspect it will be much higher) by fixing the corporate apportionment loophole the legislature created in 2014.
In return, the legislature cut the corporate tax rate by $119 million.
In the end, the bill will conservatively cost the state $30 million each year. However, the corporate changes could improve – we’ll have to see.
If you take the two bills together, it will generate an additional $30 million annually.
That doesn’t sound like much. And it’s really not. But when you consider the state’s trajectory it has been on lately, perhaps this is the bottom of the slide and we’re able to climb out now.

19. 2019 and Beyond
So now that we’ve (maybe) hit the bottom of the bad tax policy curve, where and how do we go up?

20. 2019 Legislative Session MBP Priorities Wayfair Fix LLC Loophole
Timely Filing Discount
State Work Credit (based on the federal EITC)
Combined, these priorities would bring in an additional XXXX in state revenue.
This is what I think:
Wayfair: could generate additional $137 million for general revenue and $57 million in earmarked funds (earmarked would include conservation, but also Prop C which supports schools)
LLC Loophole: If completely closed, would protect $220 million (protects revenue because it’s not yet been fully implemented. Although, 5% deduction has been. So, you could say that moving from 20% to no loophole would generate an additional $51 million and protect $169 million per year)
Eliminate Timely Filing Discount for employers $31 million in GR/year
Cap or limit timely filing discount for retailers (eliminating timely filing discount for retailers would generate $24.4 million/year for GR and $10 million/year for earmarked state sales taxes, another $34 million would be local sales tax revenue)
State work credit would cost $42.4 million/year (nonrefundable at 20% of the federal)
So, could generate/protect as much as $370 million/year (includes cost of EITC)

21. Wayfair Fix Most important thing to note:
This is not a new tax. This is an existing tax that the SCOTUS has ruled states have a new way of looking at what the “front door” actually is to a store.
Because this is NOT a new tax, Hancock caps don’t apply and the state can collect this revenue without cutting taxes somewhere else.
Not only will it collect revenue the state has been missing, it will level the playing field for local businesses who are put at a competitive disadvantage as a result of this unfair tax policy.

22. Missouri Mom & Pop Shop: Out-of-State Retailer:
Wayfair Fix
Most important thing to note:
This is not a new tax. This is an existing tax that the SCOTUS has ruled states have a new way of looking at what the “front door” actually is to a store.
Because this is NOT a new tax, Hancock caps don’t apply and the state can collect this revenue without cutting taxes somewhere else.
Not only will it collect revenue the state has been missing, it will level the playing field for local businesses who are put at a competitive disadvantage as a result of this unfair tax policy.
Missouri Mom & Pop Shop:
- Collect Sales Taxes Owed at Point of Sale
- Sales Taxes Support Our Classrooms, Parks, Neighborhoods, & Other Vital Services
Out-of-State Retailer:
- Consumer Responsible for Tracking &
Remitting Sales Taxes Owed
- Profits Leave MO
- $275 million state & local sales tax loss

23. LLC Loophole
TG NOTES: I CAN DO SOMETHING LIKE THIS FAIRLY EASILY, BUT WHAT IS REASONABLE TO USE IN TERMS OF SAMPLE #s?
This was the provision that made Kansas’ bad tax policy famous.
When fully implemented, Missouri will allow LLCs to have as much as 20% of their income tax free.
Regular folks don’t get that same discount.
This amounts to $220 million per year in unfair giveaways.
Also, because most of this loophole hasn’t gone into effect yet, most of it can be repealed without running into Hancock problems.

24. Timely Filing Discount
This amounts to $XXX million in lost revenue every year. See my notes - Amy
Enacted at a time when tax collection wasn’t computerized and it took actually people many hours to calculate taxes.
But, again, it’s not a tax discount that regular folks get.
When you and I pay our taxes we don’t even get a ‘thank you’. But if we pay late, we get a big fine.
For companies in Missouri, when they pay on time, they get millions of dollars back in tax dollars that you and I gave them.

25. State Work Credit (based on the federal EITC)
CHANGE THIS GRAPHIC SO IT READS ‘A STATE WORK CREDIT WOULD:’
While a state EITC would technically decrease state revenue slightly, the economic activity generated by it helps cover the cost. In addition, it helps level the playing field and makes Missouri’s tax system more fair for low and middle income families.

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27. Amy Blouin, Executive Director
Contact Information
Amy Blouin, Executive Director