Missouri Lawmakers Debate Eliminating Personal Income Tax

Published May 24, 2010

With Missouri’s average income tax payment having fallen nearly 30 percent this year, state senators are debating whether to do away with the personal income tax and replace it with a higher sales tax.

SJR29, sponsored by State Senator Chuck Purgason (R-Caulfield), proposes a sales tax rate of 7 percent instead of the current 4.225 percent rate. Such a change could result in significant economic growth and job creation, said economist Jonathan Williams, director of the Tax and Fiscal Policy Task Force at the American Legislative Exchange Council.

“I think the Missouri income tax elimination proposal has the potential to be a huge boon for Missouri’s economy, transforming the state into a growth state,” Williams said. “The manner of taxing is just as important as the tax itself. The American Legislative Exchange Council has looked at all 50 states’ tax policies and individual economies, and we found that state personal income taxes, especially high-rate progressive state personal income taxes, are some of the most damaging taxes on a state level.

“It does not really matter what metric you use, the no-personal-income-tax states grow much faster in job growth and population than the personal-income-tax states,” Williams said.

More Stable Revenues
Williams said Purgason’s bill is “more or less revenue-neutral.” By ending Missouri’s personal income tax, the repeated boom-and-bust revenue cycle of the ShowMe State’s budget would end, he added.

“Also, it is important to say that these state personal income taxes are really opiates to state governments, because state revenues go up when incomes go up and the times are good, and the states spend that new money,” Williams said. “However, when times are bad and incomes fall, the states’ budgets are stuck and go bust.  The stability of revenue is not there with these personal income taxes. A sales or consumption tax is much less damaging and it provides for a more stable revenue stream.”

Shifts Wealth to Feds
Professor David Henderson at the Naval Postgraduate School, however, believes this argument for eliminating Missouri’s personal income tax is not entirely convincing because the state’s personal income tax rates are low. Henderson said he also worries about Missourians losing a federal tax deduction by eliminating the income tax.

“I don’t think it’s a good idea, from the viewpoint of Missourians,” Henderson said. “The Missouri income tax, although it has graduated rates, is not nearly as extreme as California’s. The bottom tax rate is 1.5 percent, and even very low-income people pay it, and the top tax rate is 6 percent. So the usual argument for replacing an income tax with a sales tax—that it makes low-income people pay too—is not as strong for Missouri as it would be for California.

“The other problem,” he added, “is that whereas income taxes are deductible on your federal tax form for those who itemize, sales taxes are not. Therefore, this change would shift a lot of wealth from Missourians to the federal government.”

Praising the Idea
Curtis Dubay, senior tax policy analyst at the Heritage Foundation in Washington, DC hails Purgason’s move and believes it would result in tremendous new rates of job growth in Missouri.

“This would be an excellent move because no state has ever eliminated its personal income tax and replaced it with a new sales tax—this would be a great model for other states,” Dubay said. “Secondly, this is great stuff for economic development for Missourians. Just look at the states that do not have personal income taxes. For instance, Texas—its economy has done very well. The states that do not have income taxes have higher rates of economic growth.”

Thomas Cheplick ([email protected]) writes from Cambridge, Massachusetts.