Take Missouri’s 2018 decision to remove the 174-day minimum school year requirement. The goal was to give school districts greater flexibility in structuring their academic calendars. It worked. By 2023, nearly one third of Missouri districts had adopted four-day school weeks. The policy also had an unintended consequence—students now spend significantly less time in school.

While schools are still required to meet the minimum 1,044-hour requirement, Institute research shows that the average Missouri student is going to school 17 to 29 fewer hours per year than before. Over the course of an entire K–12 education, this equates to losing nearly a quarter of a school year.

This phenomenon is not unique to education policy. Unintended consequences abound in economic and social policies.

• Raising the Minimum Wage: The intention is to help low-income workers earn a living wage. In practice, however, higher labor costs often lead businesses to cut jobs, reduce hours, or replace workers with automation—hurting the very people the policy was meant to help.
• Housing and Zoning Regulations: Efforts to control urban development often result in reduced housing supply, making homes and apartments more expensive. In places with strict zoning laws, such as California and New York, these regulations have contributed to skyrocketing housing costs and homelessness crises.
• Corporate Tax Increases: Policymakers impose higher taxes on corporations to generate more government revenue, but companies respond by moving operations overseas, reducing investment, or passing costs onto consumers.

Public policies are often crafted with the best intentions, yet they reshape human behavior in unpredictable ways. When policymakers overlook economic incentives and fail to anticipate secondary effects, the result is often worse than the problem they set out to fix.

As Missouri’s school calendar experiment shows, flexibility in education policy may be valuable, but policymakers must exercise caution. Legislators should weigh not just the direct outcomes of a policy but also the unintended consequences that ripple through society.

The post Unintended Consequences: When Well-Meaning Policies Backfire appeared first on Show-Me Institute.

Getting rid of the corporate income tax has many benefits, chief among them is raising Missouri’s GDP growth rate. Countless studies have found that corporate income taxes are economically harmful. Missouri ranks 26th in the United States for GDP growth, and eliminating this tax would make Missouri a more competitive, pro-growth state. While eliminating the corporate income tax would mean giving up the $900 million in revenues that the tax raised in 2023, some of the lost revenue would be offset by higher sales and personal income tax revenues owing to stronger economic growth. Moreover, the gradual nature of the phase-out would ease the transition.

Cutting the corporate income tax rate will also lead to business growth. A 2016 peer-reviewed article in the American Economic Review found that a 1% cut in a state’s corporate income tax rate leads to a 3–4% growth in the number of establishments over a 10-year period. The study found that a lower corporate tax is also good for increasing entrepreneurship. Missouri will become more attractive to both new and existing businesses with the elimination of the corporate income tax.

Another study found that a little more than half of the total incidence of corporate taxation falls on consumers through higher product prices, with capital owners bearing only 20% and workers bearing the remaining 28%. The Tax Foundation reports that, because corporate income taxes make it more expensive for businesses to invest in technology and equipment, eliminating the tax can increase efficiency which would generate higher revenue for companies. A tax cut will enable companies to not only increase wages but also create new jobs. If Missouri’s policymakers want to increase overall economic growth, HB 2274 is a step in the right direction.

The post House Voting on Corporate Income Taxes appeared first on Show-Me Institute.

The bill would cut the top rate on personal income taxes, cut the corporate income tax rate in half and exempt Social Security payments from taxation. State Rep. Dirk Deaton, R-Noel, said the bill would promote economic growth, noting that future tax cuts included in the bill only take effect when triggered by revenue growth.

“This is really just limiting the growth of government,” Deaton said. . . .

The bill would accelerate a tax cut approved in September that will reduce state revenues by almost $800 million annually when fully implemented. The corporate tax cut would be the second in less than five years.

House Speaker Dean Plocher, R-Des Peres, made a corporate tax cut a top priority for the chamber as the session opened.

For the individual income tax, the rate would drop from 4.95% to 4.5% immediately, eventually dropping to 4.05% after a series of triggers. The corporate income tax would drop from 4% to 2%, and then to 0% after a series of triggers. The exemption for all social security income would be immediate.

I’ve pushed for reductions and eliminations of the individual and corporate income taxes for years, so it should come as no surprise that this plan is music to my ears. Income taxes are the most destructive taxes from the perspective of growth, and among them, corporate income taxes are the most destructive of them all. Reducing both with the intent of eventual elimination is sound policy.

Further, while the targeted social security carve out is understandable, eliminating taxation for certain groups of people can make the overall objective of reducing and eliminating a tax for everyone more difficult over time, with fewer and fewer people carrying the cost of government. This concern applies to an even greater degree to corporate handouts like economic development tax credits, such as the one for film studios being debated this session. Fortunately, economic development tax credits aren’t involved in this bill, at least not yet.

Thankfully, the scope of HB 816 and 606’s “targeted” tax policy is limited; the bulk is solid in principle and practice. We’ll keep you posted on the bill’s progress.

The post Tax Cut and Reform Package Passes the House appeared first on Show-Me Institute.

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But December 1st is also an important day for the legislature. That’s because it’s the first day legislation can be submitted for consideration before the chambers reconvene in January. Known as “pre-filing,” the process generally signals what the top priorities are going to be for legislators in the next legislative cycle—with the fastest filers getting the lowest-numbered bills and the sometimes dubious bragging rights of being the first to bring policy ideas to the legislative table.

What will be in the queue? In no particular order, here are some of the ideas that have been getting a lot of talk this fall and will probably be hot topics when the legislature reopens in 2023:

• Open enrollment is the idea that students in the state should, in some form or fashion, be able to enroll in a public school outside their home district. It appears that this will be a major priority in the House. My colleague Susan Pendergrass has talked about the issue at length, and it seems like she will probably do so again in the upcoming session.
• The Missouri Parents’ Bill of Rights, or MPBR, looks likely to make a comeback. The bill would guarantee parents a stronger role in their kids’ education and require curricular transparency from schools and districts that currently doesn’t exist.
• School board reform has been a popular topic of legislative debate during the break, including potential changes to when elections are held and transparency around who board members are and how they can be contacted by the public.
• Lastly in education, there may be a push to clarify who can participate in girls’ sports.
• The corporate income tax made a cameo in this fall’s special session, with a cut to the tax being stripped at the last minute from the individual income tax legislation that eventually passed. With a regular legislative session afoot, a push to cut or even phase out the corporate income tax appears likely. As with the individual income tax, I am a strong supporter of the reduction and elimination of the corporate income tax and am looking forward to hearing that debate in 2023.
• Property tax reform and changes to the Hancock Amendment will likely receive an outsized amount of debate, especially in the House. Both deal with the size of government and the tax burden government can impose.
• There also appears to be interest in the Clean Slate Initiative both inside the legislature and outside it. National organizations appear primed to get involved with a push to expunge certain criminal records, with conditions, to better integrate former inmates back into society. The exact language of the proposal remains in flux, but when it’s finalized, I’ll definitely weigh in on it.

‘Tis the season for policy. Let’s hope it’s a good one.

The post Some Thoughts on “Pre-Filing Eve” appeared first on Show-Me Institute.

While taxes create a lot of adverse incentives, those in favor of tax cuts often predict that a tax cut will create incentives that have a positive effect on the economy. Companies and individuals certainly consider the tax climate when making major decisions (like where to locate or what to invest in). States and cities with lower tax rates may find that many of those decisions work out in their favor.

A recent Wall Street Journal opinion piece gives a few examples of how a cut to the federal corporate income tax changed behavior and seems to have increased corporate income tax revenue. The article notes that corporate income tax revenue is up 22 percent from the previous year for the first six months of 2022. Though there are other variables, the piece concludes, “Lowering the rates while broadening the base by eliminating loopholes created incentives for more efficient investment decisions that paid off for shareholders, workers, and the government.”

States and cities may see similar effects if they cut taxes—like the earnings tax in St. Louis City, as one example. The 1 percent income tax and 0.5 percent payroll tax in St. Louis City only apply to those who live or work within the city limits. This tax incentivizes businesses to locate outside the city, taking their money and their workers with them. It’s understandable why businesses react this way, but it doesn’t help a city that seems to be shrinking every day.

While a reduction or elimination of the earnings tax would be a blow to St. Louis City’s tax revenue, it’s likely that this tax cut would sway business decisions in the city’s favor. Businesses would be more willing to locate in the city now that they wouldn’t be effectively cutting their workers’ pay by 1 percent. After a while, revenue collected from new businesses and workers through other taxes could offset losses from the earnings tax.

Now, does a tax cut guarantee that a government will have more revenue? Of course not; there are many other factors that affect business decisions and tax revenue generation. But this is just some food for thought: lower taxes don’t necessarily mean less revenue.

The post Lower Taxes, More Revenue? appeared first on Show-Me Institute.

Per the Tax Foundation, states with the best tax systems “will be the most competitive at attracting new businesses and most effective at generating economic and employment growth.” A state should aim for a tax system that does not negatively affect business decisions; you don’t want businesses to relocate or decide not to expand because of tax concerns. Research has found that taxes that are low and broad based are least likely to affect business decisions in this way, and therefore make the best tax systems.

Missouri ranked relatively well for state corporate income tax, unemployment insurance tax, and property tax. Areas for improvement are the individual income tax and sales tax, as Missouri ranked 21st and 25th respectively. (It’s important to note that local taxes are factored into the index, but the main focus is state taxes, so this may not be a full picture of the taxes that affect Missouri’s businesses.) As explained in the index, Missouri has a good definition of taxable income, but a lot of income tax brackets, standard deductions, and exemptions, which complicate the tax system. Missouri’s highest income tax rate, 5.4 percent, is higher than the highest tax rate of 20 other states. The sales tax index is affected by sales tax rates, including the high local sales tax rates from numerous special taxing districts across Missouri.

Lawmakers should act to improve our ranking in this index—not just for bragging rights, but to attract businesses to our state. Lowering tax rates is one way to move Missouri in the right direction. Lawmakers should continue to lower income tax rates and work to rein in special taxing districts to improve the business tax climate in our state.

The post State Business Tax Climate Ranking appeared first on Show-Me Institute.

A good example is electricity bills in Missouri. From 2008 to 2017, the average retail electric bill in Missouri rose 29 percent—the second-biggest increase in the country over that time period. After the Tax Cuts and Jobs Act (TJCA) lowered corporate tax rates from 35 to 21 percent, Missouri utilities reduced electric rates for customers. And it wasn’t just a coincidence; Missouri’s utilities specifically stated that the reason for the rate decreases was the corporate tax cuts.

For the past decade, electric rate increases for three of the four investor-owned utilities in Missouri have far outpaced average salary increases and general inflation. This means that a larger percentage of Missourians’ budgets are being dedicated to paying electric bills, with less being left over for other needs. However, that finally changed between 2018 and 2019 (2018 was the first full year of TJCA implementation) when electricity rates fell by 6 percent—customers of Missouri’s four investor-owned utilities saw cumulative savings of $159 million in 2018 alone.

In sum, just because you may not run a corporation doesn’t mean what happens to corporate tax rates doesn’t affect you. If a decrease in corporate tax rates meant an electric rate decrease for Missourians, it’s fair to believe a corporate tax rate increase would result in electric rate increases. And, as the last decade has shown, that’s an expensive proposition for all Missourians.

The post Does Your Household Pay Corporate Taxes? appeared first on Show-Me Institute.

Apparently, getting Disney to move a small chunk of its workforce to Lake Nona (a mixed-use development about 20 miles from Walt Disney World) is worth $570 million over 20 years—that’s what Disney is estimated to receive for this move. That’s a lot of money to pass up, so I can’t blame Disney for making the move. However, lawmakers are taking this money away from taxpayers, and they certainly deserve blame for that.

Clearly, Missouri is not the only state that seems to be addicted to handing out money to “help” large companies make decisions. Lawmakers across the country can’t wrap their heads around this important point: Giving away hard-earned tax dollars (or not collecting tax dollars) to manipulate the market and pick winners and losers is a bad idea. The research shows that the broader economy of an area does not benefit from these types of incentives—but the company certainly will.

Missouri and Missouri cities give out and forgo hundreds of millions of tax dollars annually. We’re not the only ones to do this, but we should be the ones to end it. Perhaps we will soon know the “magic” of actually using taxpayer dollars to provide public services to taxpayers.

The post Even Disney Magic Is Swayed by Tax Incentives appeared first on Show-Me Institute.

America’s infrastructure needs are genuine and significant. Investment in basic infrastructure (power, transportation, water supply, etc.) has failed or barely kept up with depreciation, leaving the country with an aging infrastructure stock with dwindling years of remaining service life. Moreover, although the United States spends roughly the same on infrastructure as it did in 1956 in inflation-adjusted per capita terms, it gets less bang for the buck today. In particular, the cost per mile of interstate construction has more than tripled in inflation-adjusted terms since the 1960s.

This combination of flat spending and rising costs means less actual new infrastructure. Worse yet, costs vary widely across states. From 1956 to 1993, high-cost states spent more than $8.8 million more per mile of interstate than low-cost states, and $3.3 million of this differential is due to factors under policymaker control. Thus, rather than measuring the ambition of a bill by the sticker shock of its price tag, a superior metric is to evaluate the quantity and quality of infrastructure it is likely to produce and what spillovers it will generate for economic productivity. On both counts, the Biden Administration’s plan falls far short.

First, the composition of spending in the bill appears not to have gone through any credible cost–benefit analysis to determine where best to allocate scarce (or not so scarce, given the size of the bill) dollars. For example, the American Society of Civil Engineers reports that 20 percent of the more than 4 million miles of roads in the United States are in poor condition; the same report estimates a nearly $800 billion backlog of maintenance and repair needs. Why, then, does only 5 percent of the bill (see Figure 1) go to roads and bridges, only promising to fix 20,000 miles worth of road? Moreover, why spend nearly the same amount on public transportation even though only 5 percent of people rely on it to get to work? The bill also includes Medicaid expansion of home and community-based services (HCBS) masquerading as “infrastructure.” The administration every right to make its case for a “care economy” agenda, but simply calling it infrastructure to piggyback off of the popularity of spending on roads and bridges does not make it so.

Figure 1

Secondly, and more egregiously, the American Jobs Plan’s prevailing wage, project labor agreement, and PRO Act provisions are a huge giveaway to unions that would likely raise costs, reduce growth, tilt the playing field, and overturn the will of voters in states that passed right-to-work laws to safeguard worker freedoms. The practical effect of these measures will be to reduce the number of infrastructure projects that can get completed for a given amount of spending and to needlessly harm economic performance through the elimination of worker freedom protections.

Lastly, the Biden plan partly finances the eye-popping $2.3 trillion price tag by raising the corporate income tax, thereby undermining the very competitiveness that infrastructure investment is supposed to enhance. Even the administration tacitly admits the harm such a tax hike will cause for the economy, offering only to beg other countries to raise their own taxes to prevent them from attracting companies looking for friendlier business environments in what the Biden administration misleadingly calls a “race to the bottom.” It’s hard to imagine any countries taking us up on the offer. In all fairness, the American Jobs Plan does promise workers whose jobs are displaced counseling and case management services, though many will unsurprisingly prefer to keep their job instead.

In sum, America’s infrastructure could use a jolt of investment, but the spending priorities in the bill are off target and in many cases unrelated to true infrastructure. The bill is littered with union giveaways that will raise costs and reduce the quantity of new infrastructure that could otherwise be produced, and the promised corporate tax hikes counteract the same economic growth that infrastructure spending aims to ignite. But it’s not too late. The Biden administration should learn from previous mistakes, when the Obama stimulus failed to improve the nation’s highways, and instead refocus on a pro-growth and fiscally responsible approach to solving America’s pressing infrastructure needs.

The post The Biden Infrastructure Bungle appeared first on Show-Me Institute.

That’s absurd.

To be clear: the Missouri Senate has put the brakes on all manner of tax relief for Missouri taxpayers—while pulling out all the stops for corporate welfare like the Low-Income Housing Tax Credit—for the last five months. Now that another corporate crony has come with arms outstretched and “jobs” on its lips, the folks in Jefferson City have snapped back to life and are ready to let the money pour from public coffers like they just backed over a fire hydrant with a truck.

Here’s a proposal: Permanently end the Low-Income Housing Tax Credit and save $180 million per year. Dramatically reduce and reform the historic preservation tax credit and save tens of millions of dollars per year. Drastically reduce and eventually end the corporate income tax.

Stop being such an easy mark. Stop just giving away other peoples’ money. And if General Motors needs a tax break, perhaps the people who would be forced to subsidize the company need one too.

The post Is General Motors Going to Get a Tax Cut Instead of Missouri Taxpayers? appeared first on Show-Me Institute.

In fact, in terms of the research into such matters, the destructiveness of income taxes is among the few things where there is some general agreement in the economic literature. To once again quote researcher Jens Arnold of the Organisation for Economic Co-operation and Development and his review of the evidence:

A stronger reliance on income taxes seems to be associated with significantly lower levels of GDP per capita than the use of taxes on consumption and property. Within income taxes, those on corporate income seem to be associated with lower levels of GDP per capita than personal income taxes. In fact, corporate income taxes appear to be the least attractive choice from the perspective of raising GDP per capita. [emphasis mine]

Letting the government take people’s money before it can be saved or spent denies families and businesses the opportunity to invest that money in themselves, and those negative effects compound over time. That denial of investment impacts overall GDP. It’s that simple. Removing more and more money from the private economy and increasing government’s contribution to overall state GDP is a recipe for disaster that legislators shouldn’t be entertaining.

The goal should be to continue the work of reducing and eliminating income taxes in Missouri, and new taxes on, say, internet sales should not become play money for politicians rather than an offset for income tax relief.

The post Just the Facts: Income Taxes Are Destructive to Growth appeared first on Show-Me Institute.

It’s a common problem that can cause real difficulty for anyone whose job demands aren’t always flexible, but do we need the government to fix it? Here are how some employers have chosen to deal with the issue: Companies including General Mills and Starbucks now offer a backup childcare benefit, and Best Buy recently began rolling out a new program that helps parents by giving them 10 days of subsidized childcare a year that they can access quickly through Care.com. The only cost to parents is a $10 a day co-pay.

Such programs can help both companies and their employees: The company doesn’t lose productivity from workers having to stay home, and employees don’t have to use up valuable vacation or sick days to attend to their kids when other plans fall through.

It’s a win–win scenario—a private-sector solution based on a voluntary, mutually beneficial arrangement. And it doesn’t require government intervention in the form of subsidies, which would require a decision about whether to pay for them in higher taxes or to reduce spending elsewhere. Best Buy specifically cited the lower federal corporate taxes as helping make this new backup childcare benefit possible. Wouldn’t it be better for Missouri policymakers to take a similar approach by simply making it easier for companies meet the needs of their workers?

The post Innovation in Child Care Coming from Private-Sector Employers appeared first on Show-Me Institute.

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That isn’t to say that the bill passed without drama. The initial, proposed corporate income tax rate was originally going to be 3.5 percent, based on Department of Revenue projections of what a revenue-neutral rate would look like. Unfortunately, that initial figure included a calculation error, and while the eventual 4-percent rate was the result of a better estimate, some legislators still had misgivings about that figure, too. Ultimately, however, the revised bill passed comfortably in both chambers.

Much can (and should) be said about the the fiscal note process and fiscal note products of the Missouri legislature, and no doubt much more will be said about it. For now, however, it is enough to say that the leaders who got this over the finish line deserve credit for their efforts and commitment to this important reform.

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That doesn’t mean that nothing should be done on taxes this year. In fact, a bill that would reform the state’s corporate income tax, sponsored by Sen. Andrew Koenig, has emerged from the Senate and is now before the House for consideration. The bill, Senate Bill 674, represents good policy pursued on a revenue-neutral basis, and while the legislation could be imagined as a “side car” to comprehensive tax reform plans, the bill itself is a strong standalone measure that would drastically reduce the state’s corporate income tax rate.

Cutting the corporate income tax is a cause near and dear to my heart and, with my colleague Michael Rathbone, it was the subject of one of my first essays at the Institute in 2012. That essay dove deeply into the importance of corporate income tax reform and some ways to achieve it, drawing on the broad academic consensus about the economic destructiveness of income taxes. To quote researcher Jens Arnold of the Organisation for Economic Co-operation and Development,

[a] stronger reliance on income taxes seems to be associated with significantly lower levels of GDP per capita than the use of taxes on consumption and property. Within income taxes, those on corporate income seem to be associated with lower levels of GDP per capita than personal income taxes. In fact, corporate income taxes appear to be the least attractive choice from the perspective of raising GDP per capita. [emphasis mine]

That’s why SB 674, even on its own, is important. Thus, the concern here—and a concern shared by the Washington D.C.–based Tax Foundation—is not policy-specific, since the bill is a good one, but procedural. If SB 674 is amended in the House, chances are good that the bill would simply die as the legislative session comes to a close, since the Senate would have to reconsider it and time is obviously running out.

I think most reformers would want to see reform come all at once, and in truth, there is no reason why over the last two years that couldn’t have happened on tax reform. But there is something to be said for methodical incrementalism, and I hope that serious consideration will be given to the subject of corporate income tax reform on its own terms as a springboard to larger reforms, passed this year or in the near future.

After two years of missed opportunities, it would be excruciating to see another opportunity for reform vanish at the end of this legislative session. I hope the House doesn’t let this happen.

The post Incremental Tax Reform: Don’t Let the Perfect Be The Enemy of the Good appeared first on Show-Me Institute.

Drawing on data from the Tax Foundation, Hafer and Wall examine the total tax burden facing businesses, including income, property, sales, and unemployment taxes. They find that the tax burden on a business depends heavily on the type of industry the company is in. Because of different incentives and tax breaks offered to businesses in different industries, the effective tax rates paid by some firms are much higher than what others pay. For example, manufacturers enjoy a relatively hospitable tax environment; retail establishments and distribution centers, not so much.

This uneven distribution of tax burdens might not be harmful if the firms that were taxed the least were those that have the most beneficial effects on the economy. Unfortunately, the opposite seems to be the case. It turns out that the industry Missouri favors (manufacturing) seems to be the one in which low taxes are not related to higher state growth.

It seems (again) as if policymakers are trying to pick winners and losers—and finding out how hard it is to make the right call.

The essay, available at the link below, also explores the different tax burdens faced by companies in the same industry depending on whether they are new or established firms. Hafer and Wall’s findings help explain why our allegedly low-business-tax state has experienced such anemic growth in recent years.

The post Taxing Business in Missouri appeared first on Show-Me Institute.

You might assume that as a red state, Missouri’s corporate income taxes would be low. Since 1993, the top corporate income tax rate for Missouri has been 6.25 percent, currently the fifteenth-lowest in the country. However, a new essay by R.W. Hafer and Howard J. Wall argues that categorizing Missouri as a low-business-tax state isn’t quite that simple.

Drawing on data from the Tax Foundation, Hafer and Wall examine the total tax burden facing businesses, including income, property, sales, and unemployment taxes. They find that the tax burden on a business depends heavily on the type of industry the company is in. Because of different incentives and tax breaks offered to businesses in different industries, the effective tax rates paid by some firms are much higher than what others pay. For example, manufacturers enjoy a relatively hospitable tax environment; retail establishments and distribution centers, not so much.

This uneven distribution of tax burdens might not be harmful if the firms that were taxed the least were those that have the most beneficial effects on the economy. Unfortunately, the opposite seems to be the case. It turns out that the industry Missouri favors (manufacturing) seems to be the one in which low taxes are not related to higher state growth.

It seems (again) as if policymakers are trying to pick winners and losers—and finding out how hard it is to make the right call.

The essay, available at the link below, also explores the different tax burdens faced by companies in the same industry depending on whether they are new or established firms. Hafer and Wall’s findings help explain why our allegedly low-business-tax state has experienced such anemic growth in recent years.

The post Essay: Taxing Business in Missouri appeared first on Show-Me Institute.

You can find video of the speech here. While the President’s talk was about federal taxation, I hope that his visit to Missouri will also renew the needed discussion for tax reform at the state and local levels as well. Indeed, 2018 could be a big year for tax reform nationally and in Missouri. Let’s hope.

The post President’s Visit to Springfield Sets Stage for Tax Reform Fights appeared first on Show-Me Institute.

Why the separation? Austin and I looked at the how various aspects of Missouri’s fiscal policy evolved over the past three decades, and we examined some possible reasons. For example, some people contend that Missouri state government is not demanding enough goods and services; in other words, too little state demand is the cause of slower growth. This view is discredited by the fact that state spending as a fraction of total income has been trending slightly upward. Government spends money less efficiently than the private sector, so the increase in state spending may have been part of the cause of Missouri’s anemic economic growth. In any case, lack of state demand was not the reason for the slow growth because the state’s spending as a percentage of total income has increased.

Another possible explanation is changes in the composition of state spending. In particular, spending on public welfare and health increased while spending on education and roads declined. The increased spending on social services, along with reduced investment in education and infrastructure, could account for the slower economic growth since social services amount to a transfer from one group to another while education and infrastructure are more valuable, productive forms of spending.

Did changes in revenue, particularly taxation, change? Missouri has relied relatively more on federal transfers to fund its spending since 1997. There was the 1993 hike in the corporate income tax rate, but no change in the individual income tax rate. At the state level, the sales tax base has shrunk because of statutory changes. Since we do observe a lower Missouri economic growth rate after the corporate income tax rate was raised from 4 percent to 6.25 percent, the corporate income tax is a candidate that could explain why state growth slowed.

Lastly, tax credits redeemed by Missouri state government have increased dramatically over the past 20 years. The concern with state tax credits is the return on this investment compared with the market rate of return. Remember that tax credits are state government funding specific projects while other non–tax credit projects are subject to market forces. This fact leads to the question: What is return on the state tax credit “investment?” If the state frequently offers tax credits to low-return projects, then economic growth will decline. So, we wonder if poor investment performance in the form of expanding tax credit programs might help explain why Missouri has experienced slow economic growth. In her June 2017 report on tax credit programs, Missouri State Auditor Nicole Galloway estimated that “$418 million in fiscal year 2016 redemptions (73 percent of total redemptions) were for programs with benefit/cost ratios less than 1.0, meaning the program returns less to the state than it costs.”

Overall, our research does two things. First, it demonstrates that Missouri economic growth veered into the slow-growth lane about 20 years ago. Second, it identifies factors that could account for the decline in state economic growth. While we don’t have conclusive proof of the cause, we have zeroed in on some possibilities—the growth in state spending, the shift in the composition of spending, the corporate income tax rate hike, and the growth in state tax credits—that could explain why our state is performing so poorly relative to the rest of the country. Until we have analyzed more data from around the country, we can’t allocate blame precisely among the factors we have identified. Nonetheless, at a minimum, shouldn’t Missouri abandon policies (such as tax credits) that have not been shown to produce economic growth?

Growth is ultimately about innovative things that people do. Where innovative people tend to locate does depend on the economic environment in which they operate, and that environment is determined in part by state-level policy. Whatever else Missouri state government has done in the last 20 years, it hasn’t been focused on attracting the kind of people who drive job creation and growth. That needs to change if Missourians are to enjoy an economy that keeps pace with the rest of the country.

The post Why Can’t Missouri’s Economy Keep Up? appeared first on Show-Me Institute.