Missouri's economy has stagnated for years, despite some modest successes. Policymakers often respond by instituting tax credits or other incentives designed to lure new business to the state. But the general failure of government officials to predict growth industries signals the need for a new approach in creating a favorable business climate. One alternative considered in detail by this study is to reduce or eliminate 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. Basic economic theory suggests that a tax on income distorts the labor market, by raising the real wage rate and spurring unemployment. This theory is bolstered by numerous empirical studies, which show that states with lower tax burdens have relatively better economic track records than states with higher taxes. Eliminating the individual income tax need not starve state and local governments of funding, either. Other states make up for lost income tax revenue in a number of ways, such as through higher property tax or sales tax rates. Currently, property taxes in Missouri are substantially lower in relation to the other states in which a property tax is levied, and other comparable states generally levy sales taxes on a larger number of services than Missouri does. This study concludes that altering or even eliminating Missouri's individual income tax could well improve the state's economic condition.

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About the Author

Rik Hafer
Research Fellow

Rik Hafer is a Show-Me Institute research fellow and a professor of economics and the Director of the Center for Economics and the Environment at Lindenwood University in Saint Charles, Missouri.