Our economy works better when the tax system is simple, fair, and lets workers keep more of the money they earn. Show-Me Institute scholars study the impact of tax and spending policies, and develop reforms that will give us more for our tax dollars and spur faster economic growth.
A survey of economic literature finds general agreement among researchers that higher taxes lead to lower economic growth. Stimulus spending can help those hit hardest by a recession to weather the storm, but will not help the economy to recover faster. The best prescription for reviving the economy involves lowering taxes and balancing the budget.
This study provides a review of the academic literature that has examined the relationship between taxation and economic growth, with an emphasis on the taxation of income. The study provides reliable information that may inform policy options. Key considerations in evaluating the role of tax policy in economic growth include: Taxes and economic activity are inversely related; tax policies between jurisdictions are interrelated; taxes and spending go together; and, the impact of taxes is relative.
David Stokes, a policy analyst with the Show-Me Institute, testifies before the Missouri House of Representatives Job Creation and Economic Development Committee, about the economic effects of pending legislation, House Joint Resolution 81. Stokes argues that the commercial surcharge rates established 25 years ago long outdated, and that legislation allowing local officials to reduce those rates in response to changing economic conditions would provide a strong incentive for businesses to stay in Missouri.
Despite a $50 million shortfall, Metro is pressing ahead with a plan to build new light rail lines. Rather than implementing fanciful new rail construction plans, however, Metro should implement more fiscally sound solutions to the area’s mass transit woes, such new, higher-speed bus lines, which are cheaper and far more adaptable than light rail.
A resolution currently under consideration by Missouri’s General Assembly would eliminate the state’s individual and corporate income taxes, and broaden the sales tax instead. The plan includes establishing a low-income rebate program. Despite the possibility of added administrative work in the short term, resources could ultimately be allocated more efficiently.
The Missouri auditor’s office and others have recently suggested either capping or eliminating the amount that can be retained by businesses for remitting sales tax collections. It’s important to remember, however, that the compliance process costs time and money. When the government compels somebody to perform a service, they should be compensated.
Lawrence W. Reed, president of the Foundation for Economic Education, explains the causes of the Great Depression of 1929–1941 and outlines the clear lessons that historical episode provides for modern economic crises.
During December, state tax revenues continued to fall short. According to Linda Luebbering, state budget director, revenues were down more than $170 million in December 2009, as compared to December 2008. The slide amounts to a 21.7-percent decrease. Despite the most recent decline, state officials say they expect tax revenues to bounce back slightly during the next fiscal year.
Missouri’s economic development and growth rates are chronically below average. During the past 10 years, employment has grown 8.8 percent nationally, while Missouri has boosted jobs by only 6 percent. Economists have provided one explanation for the state’s lagging performance: Missouri’s personal income tax rates.
On Monday night, Sen. Kurt Schaefer (R-Columbia) told the Columbia Board of Education that more cuts to the state budget seemed certain, and that the steep decline in state tax revenues would likely affect funding for public schools.
Despite their popularity, tax credits for film productions don’t promote lasting job growth or bring in significant tax revenue. Many productions can cost more in state funding than they generate in temporary economic activity. Eliminating the commercial property tax surcharge or the earnings tax would be a more efficient route to increased economic growth.
Federal attention has recently focused on small businesses in an effort to reduce soaring unemployment. The president has pledged help them grow and expand hiring, but in order to promote the true survival and growth of small businesses, the first step to take would be to see to it that they aren’t saddled with higher tax burdens as a result of health care reform.
Missouri’s local governments have long levied a commercial real estate surcharge. It can’t be increased by officials, but, oddly, also can’t be reduced without voter approval. This is at odds with other property taxes in the state, which usually have rates that fall as assessed valuations rise. Missouri’s large counties should place this issue before their voters.
House Joint Resolution 36 (2009), the “Fair Tax” bill, called for replacing personal and corporate income taxes with a broad, revenueneutral 5.11-percent sales tax. The legislation also called for a tax rebate to be disbursed on the first day of each month to qualified families in the state. In our view, Missouri’s economy would grow faster if HJR 36 were enacted. However, through a combination of misinformation, miscalculation, and the promotion of myths, HJR 36 was unfairly maligned.
Tariffs are politically popular, despite their lack of economic justification. Advocates of protectionism for particular industries claim to be saving U.S. jobs, but tariffs result in higher consumer prices that shrink the available resources people could use to buy other things, or invest productively. They also lead to even greater long-term job loss.
Although Kansas City officials deserve credit for wanting to update and revamp the city’s business and occupational licensing system, the city would be better served by rescinding as many license requirements as possible. This would consistently encourage business development and economic growth, rather than artificially constricting it.
Saint Louis city has been separated from the county for 123 years, but residents of both jurisdictions would see beneficial results if the two were to rejoin. Saint Louis County in particular would see a tax reduction stemming from the addition of such a large incorporated tax base that would continue to provide many of its own services.
Government spending on a proposed high-speed rail plan will amount to $90 billion for service that won’t be much faster than existing trains. Most Missourians won’t ride these trains; rather, they’ll end up paying for the transportation of people who are wealthier than them — people who don’t need such transportation subsidies in the first place.
Missouri and Tennessee are border states that resemble each other in many ways. Despite the states’ similarities, Missouri has historically been the more populous and prosperous of the two, owing in part to its size advantage and in part to historical factors. Throughout the 1900s, however, Tennessee’s population and economy have gradually caught up to Missouri's; its population is now about 5 percent larger than its neighbor to the northwest, it has a higher per-capita GDP, and its per-capita GDP now trails Missouri's by only a few percentage points. In order to evaluate why Tennessee’s economy has grown at a faster rate than Missouri’s, it is important to consider the impact of one of the most significant and enduring differences between the two states: macroeconomic tax policy.
A current proposal to increase the Federal Reserve’s level of regulatory oversight would have negative consequences. The Fed’s own track record during events leading up to the recent economic crisis indicate that it is a poor watchdog, failing to provide information when it would have helped, and later fostering uncertainty through market intervention.
The earnings taxes in Saint Louis and Kansas City have led to job loss during the last decade, as economic activity moves across the state border to Illinois and Kansas. This results in a shrinking tax base for Missouri and municipal governments, along with a commensurate decrease in tax revenue, a situation that affects all Missourians.
The states that do not levy personal income taxes have seen their economies grow at a much higher rate than those with an income tax. Economic projections indicate that if Missouri were to eliminate its state income tax, the state’s real GDP gains would total $438.6 billion over a 25-year period, which would lead to increased standards of living.
Saint Louis and Kansas City are shrinking. Both cities levy a 1-percent earnings tax on residents, and although proponents rationalize that such a low rate would not have much of an adverse economic effect, evidence suggests that — on the contrary — earnings taxes may be driving business and entrepreneurs into suburbs, away from the urban core.
Springfield’s police and fire pension system has an unfunded liability of $197 million, and filling that gap is a big political problem. Defined contribution plans like the one in Springfield are set up in such a way that government bears the risk when asset prices fall. Defined contribution plans, on the other hand, have predictable and stable costs.
Missouri’s legislative discussions of how to spend federal stimulus money were a case study in logrolling politics. Determining which subsidy would have been better for Missouri is beside the point, because our legislators do not have the ability to know which public expenditure constitutes the best use for the money.
Missouri’s House Joint Resolution 36 calls for a vote to replace the state’s income tax with an increase in the sales tax rate. Basic economics tells us that this would lead to an increase in the number of hours that Missourians are willing to work, and more production of goods and services. H.J.R. 36 would improve Missourians’ economic well-being.
Joseph Haslag, economics professor at the University of Missouri–Columbia and executive vice president of the Show-Me Institute, explains in this radio commentary for KBIA 91.3 FM in Columbia that, although Federal Reserve Chairman Ben Bernanke has been fretting about deflation, the real danger in current Federal Reserve policy is the potential for long-term inflation.
Joseph Haslag, economics professor at the University of Missouri–Columbia and executive vice president of the Show-Me Institute, explains in this radio commentary for KBIA 91.3 FM in Columbia that real economic stimulus comes from thousands of little things, a wide array of market actions and decisions that can't be anticipated or controlled by a centralized plan. "It will take some time for balance sheets to heal," Haslag concludes, "but it will happen. Citizens should refrain from idly waiting for the illusory salvation of the stimulus package."
Government officials may be tempted to raise taxes to make up for the slump in revenue. However, this would certainly make things worse — not only for government, but for families and businesses. A better solution would be to eliminate Missouri’s income tax, replacing it with higher sales taxes, which are subject to less volatility over time.
The Missouri public pension system currently faces serious long-term financial challenges. Missouri taxpayers are facing compound problems regarding the state’s ability to manage effectively both defined benefit public pension and retiree medical liabilities. While current payments to retirees are not in jeopardy, the emerging cost patterns to both current and future members and taxpayers will be predicated upon future asset growth and favorable health care cost trends, both of which present significant risks to taxpayers.
Although the promised benefits of measures like Proposition M are fairly easy to see, the costs aren’t always as obvious. In assessing whether an expansion of transit infrastructure is worthwhile, voters need to consider not only how much they might use it, but how much it would cost in relation to other potential projects.
Proposition M’s proposed sales tax increase would fund crucial transit operations and expansion, providing for an alternative to the highway system that benefits low-income workers. Widespread use of rail transit offers additional benefits to society, such as reduced gas usage, a clean travel alternative, and healthier lifestyles.
Proposition M would increase the Saint Louis County sales tax to fund transit operations and expansion. However, Metro’s string of broken promises and spending overruns suggest that the revenue from this tax increase would not be wisely spent. Ultimately, this sort of transit tax can be seen as a subsidy to central business districts.
Proposition 1, if passed, would raise taxes to fund emergency shelters and other social services. A constructive alternative to tax hikes, however, would involve expanding tax credits for those who make contributions to targeted charitable programs. Such tax credits have already seen success in Saint Louis and Kansas City.
In November, Saint Louis–area voters will choose whether to increase transit sales taxes. Metro officials worry that raising fares would lead to significantly decreased ridership, but high fuel prices may counteract that trend. What’s the best method for funding crucial transit services — low, widespread taxes, or higher user fees?
Missouri nestles against eight states, so border wars of all sorts are common. Some are fun, such as this week's Missouri-Illinois football game. But others we can't afford to lose. That includes economic competition between Missouri, which has an income tax, and Tennessee, which does not.
In June, Show-Me Institute policy analyst David Stokes submitted this testimony to the Saint Louis County Capital Investment Blue Ribbon Commission, about Saint Louis County's capital investment proposals. He argued that it's necessary to consider the economically harmful aspects of tax increases alongside the infrastructure needs that those increases are proposed to finance.
Now that Bombardier has decided to build in Canada rather than Missouri, it’s worth examining whether tax incentives are a worthwhile strategy for economic growth. While legislators certainly had Missouri's best interests at heart, both economic theory and hard data show us that real growth stems from lower tax rates across the board.
Although the economic growth benefits of tax credits are easy to see, it’s harder to see their drawbacks. Looking more carefully at the evidence and applying basic economics shows that lowering tax rates across the board is much more efficient at encouraging growth than singling out a few credit recipients at the expense of everybody else.
Tax credits may seem like a great idea to encourage growth by enticing firms to relocate to Missouri, but the reasoning used to support this type of development is almost certainly wrong. The higher marginal tax rates created by targeted credits actually eliminate more jobs than are created by the tax credit beneficiaries.
Counties in Missouri have for decades had the power to levy annual license fees on any public establishment that hosts a pool table. A holdover from earlier times when pool halls were seen as social ills, the tax remains in many areas today. This amounts to an endorsement of some types of recreational activities, and a punishment of others.
Officials who use tax credits as a plan to spur economic development tend to rely on discredited economic models. SB 1234 is one such bill, designed to attract “mega-projects” and spur related job creation. Such tax credits will cost taxpayers millions of dollars, without any reliable way of predicting relevant economic growth.
Earnings taxes may seem small, but 1 percent can add up to a significant amount over time. This is one reason suburbs have flourished near large urban centers in Missouri. Nearby towns may offer a similar range of living and employment opportunities, but with a much lower long-term aggregate tax burden.
Local taxes tend to vary significantly throughout Missouri, but most people don’t have the resources to compare tax rates for cities and counties throughout the state. The Show-Me Institute has created a new tax estimator that provides users with the ability to make more informed decisions about where to work and live.
The Show-Me Institute created "Show-Me: The Taxes" — a Missouri state and local tax estimator. We collected local tax rates from across the state in order to help Missourians better understand the taxes they pay. The estimator can be downloaded from www.ShowMeLiving.org.
Every other year, Missouri reassesses all the property in the state. In larger and faster-growing counties, there are always a large number of complaints about the process. What should Missouri do, if anything, about its assessment system?
This study considers the effects of eliminating Missouri's income tax, which would alter the state's tax structure in a way that encourages a wide variety of individuals and firms to relocate here. Evidence shows that this would not be detrimental to the growth of employment and income. Moreover, it may be possible to eliminate the income tax without sacrificing current levels of state services. Other states make up for lost income tax revenue in a number of ways, such as through higher property tax or sales tax rates. This study concludes that altering or even eliminating Missouri's individual income tax could well improve the state's economic condition.
A new policy study from the Show-Me Institute asks, "Should Missouri Eliminate the Individual Income Tax?" The study compares Missouri's relatively stagnant economy with states that do not levy individual income taxes, and concludes that altering or eliminating Missouri's individual income tax could well improve the state's economic condition.
Despite a resounding defeat in circuit court, many Missouri school districts are appealing the “adequacy” school funding lawsuit that uses taxpayer dollars to sue taxpayers for $1 billion. But such a drastic increase in public school funding would come at the expense of the rest of the state budget.
Attempts by the state to pick and choose which industries deserve to prosper in the Missouri economy will choke off the real sources of economic development and impose costs on taxpayers by increasing marginal tax rates. Growth stems from wide-ranging market activity, not state command-and-control.
What does every city with a recent eminent domain controversy in Saint Louis County have in common? They are all “point-of-sale” cities, which keep the majority of sales taxes they collect under the County’s complicated sales tax distribution formula. Legislation has been introduced in Jefferson City that would exacerbate the problem. It would change the way sales taxes are distributed in Saint Louis County and revert back to the system that existed prior to 1994, which would have even greater potential for eminent-domain abuse. Abandoning the so-called “Westfall Plan” would be a mistake with serious repercussions for economic development.
Two of Saint Louis County’s most recognizable municipalities are engaged in discussions of a merger. Clayton, the county seat and region’s second downtown, and Richmond Heights, the area’s shopping and transportation nexus, have been considering a merger since November 2004. A Joint Study Committee was established consisting of equal representation from both cities, and that committee is closing in on issuing its final recommendations. If the JSC recommends moving forward, both cities’ elected bodies would have to agree to put the measure on the ballot, and then voters of both cities would have to approve the merger. A merger would benefit the residents of both communities and improve local government services for the residents and businesses.
If we can eliminate the distortions created by the earnings tax, jobs will be created and residents will flow into the city. My model takes into account the dynamic effects that the elimination of the earnings tax would have on migration and job creation. I find that at the end of the phase-out period, the revenue-neutral land-value tax rate would be 6.7 percent. The model predicts that Kansas City could eliminate the earnings tax in a revenue-neutral fashion over 10 years, replacing it with a 6.7 percent tax on the assessed value of land. The number of people working in Kansas City would increase by 50 percent in the long run. Replacing the earnings tax with higher sales taxes is not a viable option. Like the earnings tax, the sales tax is distortionary. Higher sales taxes will simply cause consumers to shop outside of the city. Although a land-value tax would be more costly to administer than the earnings tax, the economic gains of eliminating the earnings tax would be substantial.
If we can eliminate the distortions created by the earnings tax, jobs will be created and residents will flow into the city. My model takes into account the dynamic effects that the elimination of the earnings tax would have on migration and job creation. I find that at the end of the phase-out period, the revenue-neutral land-value tax rate would be 10.04 percent. The model predicts that in the long run, the number of people working in Saint Louis would double. Replacing the earnings tax with higher sales taxes is not a viable option. Like the earnings tax, the sales tax is distortionary. Higher sales taxes will simply cause consumers to shop outside of the city. Although a land-value tax would be more costly to administer than the earnings tax, the economic gains of eliminating the earnings tax would be substantial.
Although Missouri is a relatively low-tax state, its tax advantage has been declining in recent years. Today its tax burden is roughly on par with those of its neighbors. It’s not surprising that the state has had little success attracting new jobs and businesses. We believe that Missouri can do better. The nine U.S. states with no income tax offer a particularly appealing model. They have enjoyed enviable success in attracting jobs, investment, and new residents. If Missouri phased out its own income tax, it could “break away from the pack” of Midwestern states. It would then offer a compelling alternative for prospective businesses and families interested in moving to the region and would increase wealth and opportunity for all of its residents.
This November, Missouri voters will vote on Proposition B, which would raise the state’s minimum wage to $6.50 per hour. Proponents of the ballot initiative claim that the wage hike is necessary to ensure that poor Missourians can make ends meet. What they don’t mention is that most minimum wage workers are not poor, and that most poor workers don’t make the minimum wage. Missouri consumers would pay for the wage hike through higher prices, and many of the benefits would go to middle-class teenagers. It would be far better to focus on targeted policies like expanding the Earned Income Tax Credit, which puts more money in the pockets of low-income workers at a far lower cost to Missouri consumers.
The typical minimum wage worker is young, still in school, living with a relative and living in a family that has a total family income of over $57,000. The typical poor worker is older, out of school, earning a wage substantially above $6.50 an hour, and the sole earner in a family with children. Most poor workers are poor because they work relatively few hours, not because they are paid low wages. The fact that minimum wage workers tend to look very different from poor workers suggests that increases in the minimum wage would have a limited impact on poverty. We estimate that an increase in the minimum wage would result in over 18,000 Missourians losing their jobs and would raise total labor costs for Missouri firms by $340 million. Increasing the minimum wage would reduce the overall poverty rate by less than 0.5 percentage points.
The evidence from a large body of existing research suggests that minimum wage increases do more harm than good. Minimum wages reduce employment of young and less-skilled workers. Minimum wages deliver no net benefits to poor or low-income families, and if anything make them worse off, increasing poverty. Finally, there is some evidence that minimum wages have longer-run adverse effects, lowering the acquisition of skills and therefore lowering wages and earnings even beyond the age when individuals are most directly affected by a higher minimum.
Supporters of a subsidy of the Truman Sports Center say that the proposal will spur economic growth. In fact, a tax would hurt Kansas City by taking money away from other local businesses. It would mainly benefit the owners of the Chiefs and the Royals. The proposed subsidy is unfair to taxpayers and loyal fans.
For 30 years, the city of Saint Louis has lagged behind its suburbs in economic growth. The city’s earnings tax drives businesses and residents out of Saint Louis and penalizes workers who remain in the city. Repealing the earnings tax will attract economic development and generate greater revenue for the city.
By adopting an earnings tax, a city gives businesses and residents an incentive to locate production outside the city. People go where they will obtain the highest after-tax return on their labor or investments. In order to raise the return, people locate more productive capacity outside the city limits in order to avoid the tax burden. This incentive effect can account for why the city share of per capita income is smaller in cities with earnings taxes than without. The bottom line is that city earnings taxes do matter. Cities that wish to increase their rate of economic growth should consider reducing or eliminating their earnings taxes.
The passage of Referendum C last month in Colorado has editorial boards swooning. Colorado voters had "good reason" to suspend their state’s revenue limit, cheered the St. Louis Post-Dispatch while the New York Times proclaimed that "Colorado Got Its Government Back." In their eyes, the victory of Referendum C proves that Colorado’s Taxpayer’s Bill of Rights (TABOR) was a failure and cripples efforts to enact similar proposals in other states. However, these editorial boards greatly overstate their case. An honest appraisal of the past 13 years shows that TABOR was a success in Colorado and that similar limits have a bright future in Missouri and across the country.
We teach our kids that however much we may hate losing, that doesn't make it ok to lash out at the other team or at officials. Rep. Jeffrey Roorda (D-Barnhart), it seems, never learned that lesson. He blames the Cardinals' loss on bad decisions by the umpires, and he's decided to express his frustration through legislation. He wants to extend the state's athletes and entertainers tax--some call it the "jock tax"--which levies taxes on out-of-state athletes who play away games in Missouri, to include the umpires as well. His proposal isn't just bad sportsmanship, it's bad public policy too.
A group calling itself the Coalition for a Healthy Future wants to more than quintuple Missouri's cigarette excise tax, to 97 cents a pack, and use the proceeds to help finance Medicaid, the government health care program for the poor. The proposal, which the group hopes to put on the November 2006 ballot, is bad policy. It's regressive, and it's unfair to smokers. Voters should reject it, just as they rejected a similar tax hike in 2002.
