Avery Frank, Elias Tsapelas, and David Stokes join Zach Lawhorn to break down the final week of the 2026 Missouri legislative session. They discuss the constitutional amendment heading to voters that would begin the process of eliminating Missouri’s state income tax, where property tax reform efforts stand heading into the final days, the early literacy bill’s uncertain path through the Senate, the legislature’s approach to A through F school report cards, what the state budget does and does not get right, the Ferguson city council’s rejection of a major data center tax subsidy, and more.

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Episode Transcript

Zach Lawhorn (00:00): Welcome to the Show-Me Institute podcast. I’m Zach Lawhorn from Show-Me Opportunity. Today I’m joined by Avery Frank, Elias Tsapelas, and David Stokes from the Show-Me Institute. It is the last week of the 2026 Missouri legislative session. Today we’re going to go through what has crossed the finish line, mostly what has not crossed the finish line, and see what these guys think about the possibility of that happening here in the home stretch. Elias, we’ll begin with something that has crossed the finish line, and that is the start of a discussion about phasing out Missouri’s state income tax. Legislation did pass. It goes to the governor, and he gets to decide when it goes on the ballot. So what do we know right now, what passed, and what are Missouri voters going to be asked sometime in the fall?

Elias Tsapelas (00:50): By May 22nd, the governor needs to decide whether this constitutional amendment will go on the August or November ballot. What it says, essentially, is to Missouri voters: do you want to start the process of getting rid of Missouri’s income tax? It comes with three main components. The first piece is the legislature will be required to enact legislation that would get rid of the state’s income tax based on revenue growth. Once that income tax is gone, it cannot be reinstituted. Previous versions of this bill had some details lined out about how the income tax rate would be cut based on revenue growth, but in later versions this was stripped back to just the legislature will decide this later. The other two pieces say you will also be authorizing the legislature to expand the state sales tax base, meaning the things the state sales tax applies to. This could also involve changing the rate, because right now Missouri’s constitution does not allow the state legislature to expand the sales tax to anything that was not taxed in 2015. But this does come with a guardrail: if the legislature does change the state sales tax, it has to be done in a revenue neutral fashion. So expanding the sales tax base or raising the rate to bring in additional tax revenues has to go towards lowering the state income tax. That gives the legislature the authority to change how much revenue comes in, which would speed up the process for getting rid of the income tax. The last piece is a component for local governments. If the state changes the number of things that the sales tax applies to, this would also increase revenues to local governments. Those additional revenues would have to go towards a list of other taxes that would be lowered. In places like St. Louis and Kansas City, that would go towards lowering the earnings tax. For other local governments, they get to choose whether it goes towards lowering the sales tax, property tax, personal property taxes, or real property taxes. The key piece being revenue neutral. This is not going to be a windfall for anyone. It is basically the start of a discussion, because they don’t say what the rate might need to go to, what the sales tax could be expanded to, or what revenues would trigger income tax elimination or cuts. This is just the start of the discussion, giving the legislature the authority to keep moving in the direction we started around 2014.

Zach Lawhorn (03:57): Taking those a piece at a time: the first one, if it passes and the income tax is eliminated at some point, it cannot come back. That seems pretty straightforward. The next two seem like responses to opposition that we hear on a regular basis. The first being the revenue triggers, which seem designed to prevent what we often hear about with Kansas, where they cut the income tax without cutting spending, leading to revenue shortfalls. And the expansion of the sales tax base seems like protection against having to raise the sales tax rate on goods. Do I have that right?

Elias Tsapelas (04:40): Yes. The revenue trigger piece is basically what Missouri has been doing for a while, waiting to see how much revenue we have before lowering the income tax by that amount. We’ve been doing that for over a decade now and have lowered the top individual income tax rate from 6% to 4.7%. We’re just continuing down that path to be sure we don’t create some enormous budget hole. Now, when you look at the sales tax, Missouri has a very complicated, out-of-date sales tax system. The state sales tax rate is 4.225%, but when you go to the store you’re paying something significantly higher, largely due to local governments and a lot of special taxing districts. Missouri also has a lot of sales tax exemptions. Missouri really needs a full look at its entire sales tax system. But economically, when thinking about switching a state from being primarily funded by income taxes to something closer to sales taxes, the best way to fund a state is to tax as broad a base as possible so you can have the lowest rate possible. You want to be taxing final consumption, not business inputs. As we start the idea of transferring to more of a consumption tax in Missouri, the goal is to make sure it doesn’t become a tax increase for some people while things change elsewhere. It’s trying to keep it level the whole way, and at least right now it seems like a pretty neutral proposal going forward.

Zach Lawhorn (06:24): David, for people who don’t think about taxes as a corresponding tax system, can you explain the idea of local governments rolling back certain taxes and how people might experience that on their property tax bills or personal property tax bills?

David Stokes (06:44): It’s trickier than you might think, but it’s vital that it be done right. If you expand the sales tax base at the state level, as Elias discussed, you don’t want local governments to start collecting significantly more sales tax revenue for no reason. At the state level we’ll do something good with that and phase out the income tax, but at the local government level we don’t want just more revenue with nothing to spend it on. You need tax relief for citizens, which is why they’re going to require rollbacks. They’ve given local governments some options in how you roll that rate back, which is a good thing, but they need to give them a few more options. For example, they said you could roll back property taxes, real property taxes, personal property taxes, or sales taxes. A few things that need to be considered: many municipalities don’t have a property tax, so they won’t be able to roll back the property tax. And it’s trickier to roll back sales taxes than you might think. Unlike property taxes and income taxes, which can be reduced in small increments, sales taxes have to be done in set increments. You can’t go from a 1% sales tax to a 0.92% sales tax. It’s just not allowed and would be incredibly difficult for retailers to implement. So local governments need even more flexibility in how they roll back taxes. I would say the utility tax, which just about every county imposes, is a great option to add to the choice mix for rollbacks. These are the sales taxes that can be placed on utilities, which unlike other sales taxes can be rolled back in small increments. That’s a very good option. The biggest challenge of all, though, is the special taxing districts that Elias mentioned earlier, such as transportation development districts and community improvement districts. These usually only have sales taxes and nothing else. You have to address what they do if their sales tax collections go up 30% and they have no legal way to roll it back by that same amount. So we need to adjust that. I would also hope that part of this whole deal would be a substantial cap on how these special taxing districts like TDDs and CIDs operate in the first place, to really restrict their continued expansion in Missouri, which has been very harmful. Those are just a few ideas out of many in how local governments are going to have to address this.

Zach Lawhorn (09:59): Finally, Elias, as you said, it’ll be on the ballot sometime in the fall. But between now and either August or November, people interested in this topic are going to see a lot of data, modeling, estimates, and projections. We want to be honest about what we can know and what we cannot know. With the legislation that has passed now, what should people keep in mind when they see some of these estimates or models or projections this summer?

Elias Tsapelas (10:39): The first thing is, if you see anything claiming this is going to generate a tremendous budget shortfall or major harm to local governments, this thing is set up to be revenue neutral. This is not something that is going to create enormous holes. Most of the time, estimates that reach that conclusion assume this would work in an entirely different way than what is allowed. So that is something you don’t necessarily need to worry about. What people are more reasonably worried about is: if you empower the legislature to expand or raise the sales tax, how is that going to impact everyone? Missouri’s state and local combined sales tax rates are relatively high already. The state’s portion is pretty low, but combined it’s relatively high. So what the state decides to do in terms of how much it expands the sales tax base, whether that involves more services versus goods, will impact different people differently, in different parts of the state and at different income levels. Anything right now that says this is definitely going to be bad for X person, we just can’t know that, because there’s not enough information out there. Everyone should keep an open mind and also recognize that the reason for this amendment and this proposal is that Missouri’s economy is falling behind. We are falling behind our neighbors in terms of tax competitiveness, and the only way to change that is to improve Missouri’s tax standing. Our sales tax system is incredibly broken, so this is something that is going to need to be fixed. At least right now we are at the point of asking: do we want to go down this path? Let’s hope the legislature does a good job. We’ll be shining a light on whatever they do, but we can’t know some of the things that people are warning about right now.

Zach Lawhorn (12:50): David, after the legislature got the income tax bills out the door, they shifted to talking about property taxes, which is something we hear a lot about. People want property tax reform. With only a few days left in the session, where do those efforts stand and what are your thoughts?

David Stokes (13:11): Unlike a lot of the property tax changes of the past few years, I actually like the property tax changes being proposed this year. At least one property tax bill is in conference committee being debated between the House and Senate right now. Another major bill has passed out of the Senate but hasn’t made it through the House yet. I’m told there are going to have to be some compromises on both sides to get a bill across the finish line, and there’s nothing wrong with that. The biggest change this year, which seems very much in the weeds but is significant, would take the way property taxes are imposed in St. Louis County and apply it to the rest of the state. St. Louis County has different tax rates for all the different types of property: residential, agricultural, commercial, and personal property, which includes your car, boat, farm equipment, livestock, and the like. Those rates adjust differently as assessments go up and down each year. This approach was originally intended to be extended to the rest of the state about 20 years ago when they did it in St. Louis County, but the following year they came back and said the rest of the state didn’t have to do it. It’s a good idea. It might sound strange to some people, but a good example of why it would be beneficial came from stories in the St. Louis Business Journal about the real decline in commercial property values in the city of St. Louis over the past year. Because they set one tax rate measured under one unified property value, residential homeowners in St. Louis end up making up with their taxes for the decline in commercial property. In St. Louis County, with the siloed tax rates, if commercial property goes down, the commercial property tax rate will go up to offset that instead of passing it on to homeowners. In rural Missouri, which has so much agricultural property, this would allow agricultural property tax rates to increase to fund goods in rural areas without as dramatically impacting commercial and residential property. I think this is a good idea and I hope it passes. There are also some good amendments that would put taxpayer protections in place to avoid the temptation of local officials to target commercial property with these new different tax rates. It’s in the weeds, but I think these are good changes this year.

Zach Lawhorn (16:24): That sounds like the other side of the coin from what’s happened in Jackson County, where over the last few years people have been very upset that their assessments have gone up by more than 20% and residential homeowners have seen gigantic leaps in their property taxes. Is this kind of like having to turn one knob one way and another knob the other way?

David Stokes (16:55): Sort of. The tricky part is that the situation in Jackson County for the past 10 years has been so bad, it’s hard to compare it to other counties. It’s been uniquely horrible for the people of Jackson County. But it does start with one basic truth: 15 to 20 years ago, Jackson County was under-assessed. The assessor was ordered to increase the valuations because they were improperly low, and probably artificially and intentionally low. The right approach would have been to raise those assessed valuations to more accurate totals while lowering the rates at the same time to avoid crushing people with higher taxes. But Jackson County’s taxing entities have not really done that, starting with the Kansas City 33 school district, a very large school district in Kansas City, which is the only taxing body in Missouri exempt from rolling back rates as values increase. So you’ve seen these giant increases within that school district and they don’t even have to roll back rates. They just get to keep their same rates, as they have frequently over the past 10 years. So people are getting walloped. And then you throw in the fact that the Kansas City Assessor’s Office has done a terrible job managing the process year after year, not hitting deadlines for notifying people about changes and not properly running the appeals process. It’s just been a terrible system in Jackson County, and almost uniquely so.

Zach Lawhorn (18:30): All right. Before we have Elias read the budget line by line, Avery, I want to get an update on the education items here in the last week of the session. Early literacy, the reading bill, we’ve been talking about it all session long. How’s it looking?

Avery Frank (18:47): When it first passed out of the House before spring break, 131 to 10, I was genuinely excited. It wasn’t necessarily that it passed so early; it was that it passed with such little resistance and such bipartisan support on both sides of the aisle. Teaching our students how to read, giving every student the best chance to become a confident, capable reader, that seems like common sense and a goal that everyone wants to work toward to help our state improve and perhaps become the next Mississippi. It looked that way before spring break, but the Senate version of the early literacy bill got filibustered and set aside. The House bill has made it through the process and is on the informal calendar for third reading, so it could be taken up at any time. If it does pass the Senate, I anticipate it would easily pass the House again. But that is the problem with a lot of education legislation: can it pass the Senate? There have been different concerns about the early literacy bills. Some people are concerned that the MAP test, or the Missouri Assessment Program, which we use to test all of our students, is not a good measure and we shouldn’t be basing anything on it. Some are concerned with third-grade retention and whether it actually helps, looking at states like Mississippi and noting that while fourth-grade scores are great, eighth-grade scores have only improved a little. Those are the main pushbacks we’re seeing. I would still say this is something we really need to do. The early literacy bill is built on two different pillars. The first is a mandatory third-grade retention policy. Missouri already tests all K through third-grade students with a reading screener to see how they’re doing with reading. What this bill would do is set a passing score for those screeners. If students don’t meet that score, they would be retained in third grade, because reading is such a foundational skill. If you don’t know how to read, that’s something worth holding back for, to make sure students get it down before moving on for the rest of their educational career. Students would still have the opportunity to retake the screener, and there would be good-cause exemptions for students with disabilities, for students who have been held back previously, and for English language learners. The second main pillar is reforming our teacher preparation programs. In 2023, the National Council on Teacher Quality conducted a survey of all of our universities and teacher preparation programs and found that half of them received an F in teaching the science of reading, which is the best evidence-based way to teach students to read. The early literacy bill would align our teacher prep programs with those best practices. If they don’t do it, they can’t certify teachers. You can see how there could be pushback and reason why people would filibuster or not want it to come to the floor. That’s where it stands right now. I’m hoping people set aside their objections and recognize that this is a great first step to get Missouri back on track. Our reading scores have been really poor, especially after the pandemic. They continue to decrease and have not bounced back at all. They’re lower now than they were the first year after the pandemic, and we have to turn things around. These early literacy bills, I hope people see the common sense in them.

Zach Lawhorn (22:30): It’s not even the perfect being the enemy of the good. It’s just people being afraid to push back against the status quo. Missouri has fallen back in reading test scores, and other states, most notably Mississippi, have found ways to improve. I don’t think it’s helpful to frame this as some kind of radical moonshot. In the final days of the session, the urgency cannot be overstated. The other thing we’ve talked about a lot this session is A through F report cards, a transparency measure. Governor Kehoe issued an executive order before the session started. What’s the status of the legislature trying to adhere to the governor’s executive order?

Avery Frank (23:19): The legislature has tried to legislate its own way into how the executive order gets implemented, because DESE, the Department of Elementary and Secondary Education, could implement it in their own way. The legislature wants to determine how things are going to be scored instead of letting DESE make that decision. There’s been a lot of back and forth, and a lot of different interested parties. Not to get too in the weeds, but some districts really want academic achievement, their base score on the Missouri Assessment Program, to be weighed the most heavily because that would give them the highest score. Some want growth to be weighed the most heavily for the same reason. Some want basically no grades and a lot more qualitative information. There are a lot of different factors. The best vehicle for A through F report cards right now looks like Senate Bill 1351, which continues the long legacy of education omnibus bills used in recent years in Missouri. It combines the report card, limits on screen time for young students, and a couple of other things. I’m not sure if that’s going to make it past, to be honest. People are still concerned about whether the Missouri Assessment Program is something they want to base all of this on. Personally, I think the executive order is better than the legislation as it currently stands. They got rid of one aspect I liked as a researcher: in Governor Kehoe’s executive order, there was a penalty if districts didn’t report their data properly. In the current legislation, Senate Bill 1351, if districts don’t report sufficient data, it’s just written as an aside, basically saying they have to note on their report card that there is not sufficient data, and then they’re not included in the ranking as much. I don’t like that. It gives districts, especially poorly performing ones, an incentive not to report their data so they can have this qualifier on all of their report cards. I also don’t like it because, from all the education research I’ve been doing, we really do have a data reporting problem and we need to be a lot better about transparency. I hope we get some good report cards, because right now at the Show-Me Institute we do our best with the data we have, but we have to work with unsuppressed data, meaning we don’t have data that could potentially identify certain students. So there are some districts we have no data on because they’re so small. But DESE and the state have the best data possible. They could make a really good report card even better than we could, because they have better data than we do. That’s why I’m really hoping we get a good report card, because it would be very helpful for all the parents, legislators, and researchers across the state to see which districts are doing well and learn from them, and which ones are doing poorly and need more support.

Zach Lawhorn (26:42): Let’s talk about the budget. Elias, the legislature passed the budget a little early this year. They beat the deadline by a couple of days, right?

Elias Tsapelas (26:53): They finished early, which is a little bit different than the last few years.

Zach Lawhorn (26:56): Are we spending more or less money than last year?

Elias Tsapelas (27:01): Spending less, but I’m not throwing them a party. There’s just a lot less federal money going around. There was a lot of COVID money in recent years, and Missouri hasn’t spent all of it. The current budget this year is about $54 billion. What the legislature passed is a little bit less than $50 billion, depending on whether you count different construction items. But there was a lot of federal money in that total. At the end of the day, what we’re looking at is a budget that is still going to spend more general revenue, where our income and sales tax dollars go. It’s still going to spend more than we expect to bring in. So we’re still going to exhaust all of our surplus that we built up over those years. There were some positive things that happened this year, but ultimately part of how they got the budget done early was by spending just a little bit more, so they left some of the good on the table.

Zach Lawhorn (28:20): So we’re spending the surplus, as you’ve been warning about for several years, the federal money is drying up, and to circle back to the opening segment, I think part of the trust the legislature is going to have to build this summer is demonstrating we’re getting spending under control. You said you’re not throwing them a party. But is this reduction, whatever the reason, directionally good enough for the legislature to say they’re working on the spending side of things, or is it just not good enough?

Elias Tsapelas (29:00): I think I’ll know a lot more going into next year, because there were a lot better discussions this year, especially looking at spending incentives. As was mentioned, DESE is going to have a new funding formula, or at least the governor has a task force working on one. The way education is funded for K through 12 is going to change. There was also a big fight this year about how to fund higher education. What seemed to me like a common sense idea, essentially having the legislature fund colleges based on how many students are enrolled, turned out to be considered too radical and was pushed off for the future. But there’s talk of coming back with a performance funding measure going forward. There’s also some movement on changing how the state does its IT work. There are a lot of IT changes coming, including things affecting Medicaid and the Supplemental Nutrition Assistance Program. Missouri has a very bad track record with IT. Part of this budget moves some IT resources over to the Department of Social Services to support getting things going there, because most IT for the state of Missouri is currently consolidated in the Office of Administration. While that can seem efficient because every state department doesn’t need its own IT department, it also makes it a lot harder to hold people accountable. There has been a big issue recently with the state’s accounting software, where a contract is millions of dollars behind schedule and not working. The budget tries to get at that too, and it raises this major incentive question: are the people in charge of implementing new IT going to do their best at something that will ultimately try to eliminate their job? I think the legislature is finally starting to deal with that. Ultimately, if we go down the path of a more efficient government and a better tax system, that may mean fewer state employees, and that is something that hasn’t come up much but I think the legislature is finally starting to look at. Pushing toward better funding models, a better state workforce, all those type of things, is moving in the right direction as opposed to how it has been, where the budget just grows larger every year. They’re looking in the right direction. I would have liked to see more, but I think we’ll know a lot more in the next year, especially because the federal COVID funding will essentially be gone.

Zach Lawhorn (32:12): Our final topic, partly so we can put it in the title of the episode for clicks, but also because it seems like every week there’s a story from across the country or across the state about data centers and communities pushing back for a lot of reasons. The most recent one was Ferguson in the St. Louis area. David, can you catch us up on what was on the table for this data center in Ferguson and what happened?

David Stokes (32:40): The vote that the Ferguson city council took last week was strictly on a tax subsidy, I believe about $1.8 billion in tax abatements and various subsidies for the project. It was not a vote on approving the data center itself. This was a commercially zoned area, so it didn’t need any permission to put a data center there, and that’s a good thing. But the city nonetheless rejected the tax subsidy, which I thought was the right call. These data centers are very profitable and important, and I’m certainly not anti-data center. But the demand that they get enormous subsidies everywhere they seem to be going is improper. Festus was right to approve the data center operation there, but I think very much wrong to approve the enormous tax subsidy the city granted, which I believe was about a half a billion dollars. Avery can correct me if I’m wrong on that exact number. I like what Ferguson did, and I hope the data center moves into the old Emerson complex there nonetheless. We need data centers. Data centers produce so much tax revenue that they can generate their own tax cuts, and I don’t mean a special subsidy for the data center itself. I mean they go into a city or a small area, generate so much revenue, and you can cut taxes for everybody in that community, including the data center itself. I think that’s the road to follow, and hopefully that’s what we’ll have in Missouri. I also think we need to change the way data centers are taxed in an upcoming legislative session, taxing them a little more like utilities to reduce the incentive for one city or county to hand out a big subsidy and instead spread those tax benefits around a little more.

Zach Lawhorn (34:46): Avery, are you heartened by this rejection? Because as David said, we need the data centers, but we really want to avoid this new layer of corporate welfare that could pop up everywhere. So how do you feel about it?

Avery Frank (35:00): I’m actually very excited by the rejection in Ferguson. I’ve talked to a lot of people on both sides of the data center debate, those who have gone to the meetings and stayed up until 3 a.m. and protested, and those who want them. When I look at this Ferguson project specifically, the numbers David was talking about involved granting up to 15 years of tax abatements on real estate, personal property, and sales tax for a data center project. When I see something like that, it gets at what David was talking about. The only true significant benefit of a data center is the tax revenue it could bring. It doesn’t bring a lot of jobs. It takes a lot of electricity and a lot of water. It generates noise. It already makes a lot of people upset, and there are concerns about housing values and everything else. So if you’re not getting any tax revenue, there really is no strong incentive to have a data center project. That Emerson complex in Ferguson had thousands of employees. A data center does not take very many employees at all. So when you have people coming up and saying this data center project won’t succeed unless we get all these tax subsidies, I say that’s fine and I hope you don’t build a data center there, because the tax revenue is really the only benefit you’re getting from it. One of the bigger things is just something about Missouri in general. I’m from Tennessee and there are a lot of concerns there about having too much growth. Missouri sometimes feels like the opposite of Tennessee. We’re so desperate for growth that we’re willing to hand out a bunch of money. We don’t have enough pride. This Emerson complex is a good building and a good place. Ferguson has a STEM high school that produces very high test scores and graduates people who can work in the tech industry or an engineering industry. We shouldn’t waste a good building and a good workforce on a project that’s going to get all these tax subsidies and not bring a lot of jobs. The same thing happened over in Independence, where they gave out billions in subsidies for a data center project. Whenever I see that, I think we have to have a little bit of pride in Missouri. We can’t just be giving out all this money to get anyone to come. We have a good parcel of land, a good workforce, a lot of water, and a central location in the country. We can attract good projects, data centers or not, without giving out a bunch of subsidies. We need to understand what the benefits and costs of a data center are and what data center developers are actually looking for. They have a lot of money already. If you give them a good workforce, a place to build, and community support, I think they’ll come, even without a bunch of money.

Elias Tsapelas (38:28): I was really hoping this was the discussion we were going to have this year in Missouri’s legislature, because it started off so well with the discussion of how to get rid of the income tax and everything that goes with that. Talking about the income tax is really about how you make your state more desirable and how you grow faster. But Missouri for so long has just said: we want this industry or this type of business, so let’s give it an economic development tax credit. Let’s give out a billion dollars worth of those. Let’s give out sales tax exemptions. As far as I know, data centers in Missouri already get state and local sales tax exemptions. We just give those out. If we’re really going to start thinking about how to make the state the most desirable place, how to grow the fastest and be the most desirable for families and businesses, that’s really more about making the tax climate the best for everyone, not constantly picking winners and losers. Unfortunately, the budget didn’t see as many cuts as I had hoped. As we go into the last few days of the legislature, there are plenty of tax credit bills waiting to pass. The film tax credit is back and there’s talk of extending the sunset on it. There are other tax credits. We’re still going down that path. There are still more sales tax exemptions being considered. Missouri just needs to decide what direction we want to go, because ultimately if we do get rid of the income tax, a lot of these economic development incentives don’t even really work anymore. You have to look at different things. You have to look at what is really the criteria for families and businesses. States across the country are dealing with these issues, changing their economic conditions, their tax policy, and people are moving there. We know people are leaving Missouri. We know income is leaving Missouri. We need to change things. The status quo is not going to work going forward, and I was hoping that would have sunk in a little bit more this year than it did.

Zach Lawhorn (40:37): We will leave it there this week. We’ll talk to everyone again after the session ends over the next few days and see how everything turned out. As always, plenty more at showmeinstitute.org. David, Avery, and Elias, thank you very much.