When A Tax Break Isn’t

Democrats in the Missouri House of Representatives recently unveiled their tax reform plan. Here are some of the highlights:

• Starting in 2016, Missouri would have just three tax brackets: A 4 percent tax rate on annual incomes of $30,000 or less; 6 percent on incomes between $30,000 and $300,000; and 8 percent on incomes higher than $300,000.
• There would be an additional tax deduction for those making less than $15,000.
• The limit for the total amount of federal taxes a taxpayer can deduct from his/her income would be lowered, from $5,000 to $2,000 for singles and from $10,000 to $4,000 for combined returns.

I am glad there is growing recognition that Missouri is not a low-tax state (at least for most people). I like the fact that this proposed plan shrinks the number of tax brackets from 10 to three. I also like that many Missourians would receive some tax relief. However, raising taxes on those making more than $300,000 a year is not a good idea.

Now, it’s easy for some people who make significantly less than $300,000 to shrug their shoulders about taxes increasing on Missourians with higher incomes. “I’m getting more money, so what if some rich guy has to pay a little more. He can afford it.” The reality is that many of these “rich” people are business owners who report their business income at the individual level. If the state starts taking even more money from these business owners, that’s less money for payroll, which means less money for new workers and less money for raises. Is that going to stimulate economic activity in Missouri? I don’t think so.

If I lived in Kansas, I would love this bill. Unlike Missouri, Kansas business owners face a tax rate of zero. If this bill actually became law, Kansas businesses would have a significant tax advantage over those in Missouri, which would make Kansas an even more alluring destination for Missouri businesses. That isn’t an attractive prospect for Missouri’s economy.

Also, I don’t like this bill limiting the amount of federal taxes someone can deduct from his/her state taxes. The money I pay out in federal taxes isn’t income. I can’t go out and buy a new phone or television with it. I can’t save or invest it, either. So why would the state treat it as if it is income? Limiting this deduction without reductions elsewhere is a form of double taxation.

The sponsors of this bill are to be commended for wanting to bring tax relief to a significant number of Missourians. However, this positive does not outweigh the negatives of increased income taxes on other residents (through higher rates and limited deductions), including many business owners.