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While guest-hosting Mundo in the Morning on KCMO Talk Radio, Patrick Tuohey is joined by Elias Tsapelas to discuss the Missouri legislature’s effort to begin eliminating the income tax. They break down why Missouri’s tax climate is holding back economic and population growth, how a gradual phase-out could work, and why concerns about sales tax rates may be overblown.

The post Missouri’s Path to Eliminating the Income Tax with Elias Tsapelas appeared first on Show-Me Institute.

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.

The post Missouri’s 2026 Legislative Session Final Week appeared first on Show-Me Institute.

As Missouri’s legislative session winds down, lawmakers took a major step toward eliminating the state’s individual income tax. Both chambers of the general assembly approved HJRs 173 and 174, a proposed constitutional amendment. Voters will now decide whether to authorize the legislature to begin the process of phasing out the income tax.

Here’s a short summary of what voter approval of the amendment would set in motion:

• Requires the general assembly to enact legislation reducing the state’s top individual income tax rate based on revenue growth until it is eliminated. Once eliminated, the tax could not be reinstated.
• Authorizes the general assembly to expand the sales and use tax base to include additional goods and services. Currently, Missouri’s constitution doesn’t allow sales and use taxes to be expanded to any service or transaction that wasn’t taxed on Jan. 1, 2015.
• Requires that any changes to state or local sales and use taxes that generate additional revenue be offset. At the state level, that revenue must be used to reduce the individual income tax rate. At the local level, governments receiving additional revenue must reduce one or more other local taxes by a commensurate amount, choosing from a specified list that includes earnings taxes, personal property taxes, real property taxes, or local sales and use taxes.

This move comes at a time when Missouri is struggling to keep pace nationally. As my colleagues and I have written about repeatedly, the state’s population growth has been flat, and economic growth ranks in the bottom half of the nation. And while Missouri has reduced its top income tax rate from 6 percent to 4.7 percent over the past decade, many neighboring states have moved faster. Across the country, states are enacting policies that make them more attractive in the competition for families, workers, and investment, and it’s clear that states with low or no income taxes are pulling ahead.

If Missouri wants to change that trajectory, its tax structure has to be part of the conversation.

As I wrote when I testified on the amendment, this proposal does not eliminate the income tax overnight or answer every question up front. What it would do is give the legislature clear authority to move in that direction if voters approve. That matters because any serious effort to phase out the income tax will, sooner rather than later, require a rethinking of the state’s tax structure, especially its outdated and broken sales tax system.

In that sense, the amendment is less about a single policy change and more about forcing decisions state officials have avoided for years. What is a fiscally responsible pace to phase out Missouri’s individual income tax, the state’s single largest source of revenue? How much faster could that process move if the state modernizes its sales tax base? How should the tax policy actions of surrounding states impact that timeline?

There will undoubtedly be difficult tradeoffs if voters approve the proposed amendment, but it’s important to recognize that they are unavoidable. Improving Missouri’s economic prospects will require decisive action and an acknowledgement that maintaining the status quo has produced slow growth and will leave the state further behind its peers.

There are real concerns about how a transition like this would work and who it would affect. Those details will matter, and they will be decided through the legislative process if voters approve the amendment.

With the legislature’s work complete, the remaining question is when voters will weigh in. Under Missouri law, the governor has until May 22 to determine whether the measure will appear on the August or November ballot. The timing of that vote will shape how quickly Missouri can begin addressing these questions and close the gap with states that are already ahead.

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David Stokes, Elias Tsapelas, and Avery Frank join Zach Lawhorn to break down the latest from the 2026 Missouri legislative session, including updates on the push to eliminate Missouri’s income tax. They also discuss why the film tax credit doesn’t work out for Missouri taxpayers, which provisions of the early literacy bills are still moving forward, the growing debate over data center incentives and energy demands, and more.

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TO THE HONORABLE MEMBERS OF THE COMMITTEE

Thank you for the opportunity to testify. My name is Elias Tsapelas, and I’m the Director of State Budget and Fiscal Policy at the Show-Me Institute, a nonprofit, nonpartisan, Missouri-based think tank that advances sensible, well-researched, free-market solutions to state and local policy issues. The ideas presented here are my own and are offered in consideration of proposals that will affect tax credits in Missouri.

Senate Bill 1079 consolidates Missouri’s existing film and series production tax credit sub-caps into a single $16 million pool for both, leaving the state’s total commitment the same. The only substantive effect of the bill would be to give the Film Office more flexibility in how the same dollars are allocated. That flexibility does not address the fundamental problem with this program.

Current and Past Tax Credit Failures

Despite the Missouri film tax credit’s recent revival, our state has a long history with this troubling incentive. Until its sunset in 2013, Missouri’s previous iteration made promises similar to what supporters are touting today. Missouri’s own Tax Credit Review Commission recommended the credit be eliminated because it served too narrow an industry and failed to provide a positive return on investment.¹

Research confirms that pattern holds nationally. Film tax credits have not resulted in job growth, have not affected market share or industry output, and have produced only short-term wage gains for those already in the industry.² Credits in many states generated just cents on the dollar. As one Tax Foundation analyst notes, “non-favored activities and businesses remain on the hook to bear the full impact of the state’s tax code.”³

The Missouri Film Office has pointed to the number of projects approved and production spending in the state as evidence the program is working, but that is not the right measure for determining whether the program is a good investment for state taxpayers.⁴ The relevant question is how much the state receives back in tax revenue and broader economic activity—and by that measure, the research is consistent: film tax credits do not generate a positive return.

The Competitiveness Argument Doesn’t Hold

Supporters of SB 1079 argue that pooling the sub-caps will make Missouri more competitive for productions. Even setting aside the ROI question, that argument doesn’t hold.

Steven Conrad, the showrunner who created a new HBO series set in St. Louis and filmed it entirely in Atlanta, recently suggested that governments may not be well-served by chasing the film industry at all.⁵ His observation reflects a structural reality: Georgia has spent two decades building the studios, crews, soundstages, and production infrastructure that make large productions possible. Missouri has not. No reallocation of $16 million changes that.

Georgia’s own state auditor found that even Georgia’s fully developed, deeply established program returned just 10 cents to the state for every dollar of credit granted, producing a net revenue loss of $602 million in a single year.⁶ If one of the most mature film-incentive programs in the country cannot generate a positive return on investment, a program at a fraction of its scale operating in a state without comparable infrastructure has no prospect of doing so.

Targeted Credits Are Poor Economic Policy

Targeted economic development tax credits are just another way for lawmakers to pick winners and losers, a job that is better left to consumers in the market. When tax breaks are given to some, other taxpayers have to make up for the lost revenue. The impulse to do something to support an industry is understandable, but tax credits are a poor substitute for the conditions that make industries thrive organically. A dollar of film tax credits reduces state revenue by exactly the same amount as a dollar of direct appropriations—the difference is that credits bypass the appropriations process and receive less scrutiny.

Prioritize Tax Relief That Benefits All Missourians

Missouri is already a national leader in state spending in the name of economic development. Over the past few decades, Missouri has forgone billions in state tax revenue in favor of a host of narrow incentives that have consistently shown poor results. In FY2025 alone, Missouri redeemed more than $961 million in tax credits—nearly double the $521 million redeemed in 2010.⁷ The General Assembly is simultaneously weighing whether to eliminate the state income tax, a reform that would deliver broad economic benefits to every Missourian. The legislature should consider whether a growing tax credit portfolio is consistent with that goal. Expanding targeted credits that erode the income-tax base works against broad-based tax relief, and Missouri would be better served by pursuing the latter.

The film tax credit is a small program, but it exemplifies the approach to tax policy that makes comprehensive reform harder to achieve. Tax credit programs have not been successful in Missouri in the past, there is little evidence to suggest the film tax credit is succeeding now, and there is no reason to believe this program will perform differently under a restructured allocation. If increasing economic opportunity is the goal, the research is clear: Instead trying to manufacture more opportunities at the expense of taxpayers, lawmakers should provide broad-based tax relief to every Missourian.

NOTES

1. “Report of the Missouri Tax Credit Review Commission.” Missouri Tax Credit Review Commission. 2010; https://www.semissourian.com/files/tcrcfinalreport113010.pdf.
2. “Lights, camera and no action: How state film subsidies fail.” USC Press Release. August 18, 2016; https://pressroom.usc.edu/lights-camera-and-no-action-how-state-film-subsidies-fail.
3. Loughead, Katherine. “Illuminating the Hidden Costs of State Tax Incentives.” Tax Foundation. 2021; https://taxfoundation.org/state-tax-incentives-costs.
4. “Made-in-Missouri Film and TV Productions Spent $40.7 Million in 2025.” Missouri Department of Economic Development. February 2026; https://ded.mo.gov/press-room/made-missouri-film-and-tv-productions-spent-407-million-2025.
5. Neman, Daniel. “HBO’s DTF St. Louis has a dream cast, but it wasn’t shot here.” St. Louis Post-Dispatch. February 26, 2026; https://www.stltoday.com/life-entertainment/local/movies-tv/article_cfa2d34c-435a-40fd-9fa5-75933d716915.html.
6. “Impact of the Georgia Film Tax Credit.” Georgia Department of Audits and Accounts, Performance Audit Division. Report No. 18-03B. January 2020; https://www.audits.ga.gov/ReportSearch/download/23536.
7. “Fourth Quarter Tax Credit Report, Fiscal Year 2025.” Missouri Department of Revenue. 2025; https://dor.mo.gov/public-reports/documents/Fourth-Quarter-FY25-Tax-Credit-Report.pdf.

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David Stokes, Elias Tsapelas, and Avery Frank join Zach Lawhorn to break down Governor Mike Kehoe’s State of the State address, including what we know so far about his plan to eliminate Missouri’s income tax, proposals to modernize Missouri’s tax system, and the need to rein in state spending. They also discuss open enrollment legislation, the new Missouri Advanced Nuclear Task Force and AI strategy executive order, the push to privatize downtown St. Louis convention center operations, what the Dome’s history says about stadium subsidies, Kansas City’s stadium debate, what they are watching in Jefferson City, and more.

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Missouri’s economy is suffering because of an overreliance on the income tax as a source of revenue.

The Solution

Continue to reduce or eliminate the use of the individual income tax and earnings taxes.

Key Facts

• Missouri collects around two thirds of state revenue through the income tax, which is the third-highest percentage among states, just after New York.

• Missouri’s GDP growth rate for 2024 was 2.3%, which ranked 30th in the country, falling well below the national average of 2.8%.

• Missouri’s two biggest cities rely on a 1% earnings tax, which will be increasingly problematic as non-city residents move toward remote work rather than traditional work in city-based offices and escape these taxes.

Income Taxes Are Holding Missouri Back

Missouri’s economy is once again lagging behind much of the country, and state and local tax structures are a part of the problem. Missouri has the third-worst reliance on income taxes as a share of state revenues in the country, just behind New York. Such a reliance on these harmful taxes—on income taxes at the state level and earnings taxes in Kansas City and St. Louis—has consequences.

Learning from Boom States

Missouri would be wise to take a page from the playbooks of zero-income-tax boom states such as Florida and Texas, which have been magnets for attracting and retaining people, jobs, and investment. In recent years, Missouri lawmakers have taken some steps to reduce the state individual income tax. Most recently, the legislature passed a law to gradually reduce the income tax to 4.5%, triggered by the state meeting certain revenue targets. However, there is no reason to stop those tax reductions at 4.5% if revenue targets continue to be met. Not only would income tax reductions allow citizens to keep more of their hard-earned money, but they would reduce the state’s reliance on income tax revenue and make the state more competitive.

Fiscal Year 2026 Revenue by Source

The lion’s share of state general revenue will continue to come from the income tax for the foreseeable future, but continuing rate reductions would lessen this reliance over time.

Policy Recommendations

• Allow the state income tax to fall below 4.5% with the goal of eliminating it completely.

• Remove the cap on the number of income tax rate reductions based on state revenue triggers and allow the rate to be reduced commensurate with the amount by which the trigger is exceeded.

The post Income Tax Reform appeared first on Show-Me Institute.

Going into the 2025 legislative session, it was clear that income tax reform was going to be a hot topic. Not only was it a top priority listed in the Institute’s 2025 blueprint, but numerous bills were also filed before the session began both to incrementally lower the income tax rate and to eliminate the tax altogether. Then, during his first State of the State address, Governor Kehoe officially stated his support for eliminating the individual income tax.

As my colleagues and I have written for many years, there are many good reasons for Missouri to abandon its reliance on the income tax. Decades of economic research have shown that the income tax is one of the most economically damaging forms of taxation, penalizing workers for their productive pursuits. But in recent years, 25 states (not counting Missouri) have lowered their income taxes, including many of Missouri’s neighbors, which should only increase our state’s urgency for meaningful income tax reform.

It’s no coincidence that year after year the fastest-growing states across the country are those without income taxes. If Missouri is serious about joining those states—and we should be—bold action in Jefferson City is necessary. While Missouri’s elected officials have been successful at lowering the state’s top individual income tax rate by 1.3% since 2014 (from 6% to 4.7% today), Missouri is still one of the states most reliant on income tax revenue.

Eliminating the income tax in a fiscally responsible way will not necessarily be easy given that Missouri’s budget has nearly doubled in size in recent years. But the process must start with a single step, and lowering the rate incrementally to 3.7% (what HB 798 proposes) is a great place to start. As lawmakers enter the home stretch of this year’s legislative session, there’s still a lot of work to be done if eliminating the income tax is truly the goal. Time will tell if their actions match their stated priorities.

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Think of some of the top GDP growth states in the nation: Florida, Texas, Tennessee. None of these states have a state income tax. Free markets really do matter, and it has been demonstrated time and time again around the world and in the United States.

The Fraser Institute issues a periodic ranking of states according to “economic freedom.” According to its most recent ranking, Tennessee came in third—right ahead of number four Texas, but behind number one New Hampshire and number two Florida. Missouri came in at a respectable, but distant, number 15 ranking. Almost all of the “least economically free” states in Fraser’s report (New York, California, Illinois, West Virginia, and New Mexico), saw population loss.

Not coincidentally, Texas, Florida, and Tennessee have also dominated the U-Haul Growth Index, which measures the ratio of one-way, inbound U-Hauls versus one-way, outbound U-Hauls.

Granted, it is hard for Missouri to be Texas or Florida when we do not have the geographical gifts that those states enjoy.

But Tennessee is right on Missouri’s border and has much in common with the Show-Me State. Tennessee eliminated taxes that hamper growth (such as the Hall Tax, which taxed stocks and bonds), prioritized education reform to increase school choice and accountability, and its leaders are embracing its identity as a pro-growth, freedom-loving state.

Missouri has made recent progress in lowering the income tax burden. Since 2017, the top income tax rate has decreased from 6 percent to 4.7 percent for 2024.

Bringing the number down to zero should not just be a talking point—it ought to be a serious goal. If we want to be a top growth state, a nationwide destination for families, and attract more businesses, lowering the income tax is a great place to start.

I can speak from experience: having no state income tax is a luxury and a draw. Don’t we want that in our state too?

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My purpose here is simply to respond to one statement in the article by St. Louis’s Mayor Jones:

“I urge those who want to eliminate the earnings tax to show me their plan to replace it, their pro forma on these so-called ‘fiscal cliffs,’ and why cities with much higher earnings tax rates continue to grow,” Jones said in a statement.

I would like to remind people that, as for a plan to replace the earnings tax, the PFM Group out of Philadelphia has provided St. Louis with multiple, enormous reports on fiscal options for the city. Having read these studies, I assure you they go into great detail on these topics. If the city and its leaders aren’t serious about considering and incorporating these recommendations, among others, that’s on the city.

Do some cities with earnings taxes continue to grow? Of course they can. Some cities, like, say, New York City, have qualities and advantages that help them overcome the harms of local income taxes and continue to grow nevertheless. That shouldn’t surprise anyone, but it doesn’t mean local earnings (also known as income or wage) taxes don’t harm cities. Nobody is saying that a city can’t grow if it has an earnings tax. The claim—backed up by evidence—is that they would grow faster without one.

You don’t have to take our word for it (but you should). In Triumph of the City, Harvard economist Ed Glaeser states: “The indirect effect of a local income tax is to encourage richer citizens and businesses to leave.” He cited this study, in which the authors determined that, among other findings, “We estimate that between 1971 and 2001 Philadelphia lost 172,889 jobs because of the increase in city wage tax rates.” (Similar effects were found for New York City.)

It’s one thing to say the city is not in a position to immediately drop the earnings tax in one fell swoop. That’s a defensible position. It’s another to deny that it harms economic growth. That’s not defensible. The worst part, though, is watching the city enact legislation and pass constant tax subsidies that make it more dependent on the earnings tax, instead of trying to be less dependent on it over time. The city has chosen to put itself in this position, and that is regrettable.

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Why stop at 4.5%? As the state’s general revenue grows, shouldn’t tax rates be adjusted accordingly so that the total size of government doesn’t also grow? By eliminating the limit of three reductions to the income tax rate from the law, Missouri can set forth a fiscally responsible glide path to eliminating the income tax entirely, using current law to facilitate this autopilot tax reform. Letting taxes drop as revenues rise is an appropriate and efficient way of achieving this end.

We have talked at length and for years about how destructive income taxes are to growth and why they should be phased out and ended in Missouri. Accelerating that stepdown is worthwhile, but not stopping that stepdown is just as important, given the current law. Policymakers should remove the floor and let the individual income tax rate continue to fall if government revenue keeps rising.

The post Why Don’t We Remove the Floor from Missouri’s Income Tax Triggers? appeared first on Show-Me Institute.

Republicans in the House of Representatives will vote on a bill that would abolish the Internal Revenue Service (IRS), eliminate the national income tax and replace it with a national consumption tax.

Fox News Digital has learned that the House will be voting on Georgia Republican Rep. Buddy Carter’s reintroduced Fair Tax Act that aims to reel in the IRS and remove the national income tax, as well as other taxes, and replace them with a single consumption tax.

The vote on the bill was made as part of the deal between House Speaker Kevin McCarthy, R-Calif., and members of the House Freedom Caucus and was pushed forward in his quest for the gavel last week.

Am I saying there’s a chance?! No, not really. The Senate and the president will almost certainly reject abolishing the income tax, and it’s not entirely clear that even the House has the votes to pass it through the chamber. Then there’s the sticky issue of repealing the 16th Amendment, which enabled the national income tax; if this law were to pass, you’d need to repeal the amendment so that we won’t someday end up with both a sales tax and a renewed income tax! Details, details.

But is a national move away from the income tax the right idea? Undoubtedly. Income taxes are destructive to growth at all levels of government, and as Institute analysts press for the elimination of Missouri’s income taxes, our federal counterparts should consider similar tax reductions and reform. Whether this latest effort is the best approach or even has a snowball’s chance of success remains to be seen, but I’m glad the conversation is at least being had. It’s overdue.

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On September 20, 2022, Show-Me Institute and Show-Me Opportunity hosted a discussion with Arthur B. Laffer, Jeanne Sinquefield and Brian Domitrovic about their upcoming book Taxes Have Consequences: An Income Tax History of the United States.

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Tax relief and reform alone won’t solve all of Missouri’s problems or immediately launch Missouri to the front of the pack in attracting talent and capital from around the country. We need better schools with more educational opportunities We need to reduce crime, especially with three of our major cities—St Louis, Kansas City, and Springfield—ranking distressingly high on national crime indices. But solving either, let alone both, of these problems is very complex and likely to require a multi-pronged approach as policymakers work to build consensus and tackle each element of the problem.

There are some things Missouri can never have—like Florida’s coastline (although the Lake of the Ozarks is plenty to brag about)—but implementing good tax policy is well within our grasp. Some would seek quick, superficial, and ultimately harmful “fixes,” like using subsidies or tax credits (subsidies by a different name) as handouts to lure large, well-connected companies to expand in Missouri, with no guarantee that any jobs they create would outlast the flow of taxpayer money. But history and research have undermined the claim that we can subsidize our way to prosperity or successfully pick winners and losers. One thing policymakers absolutely can do is create a better, more level playing field for families and small businesses with an income-tax cut that returns money to their pockets and reduces the penalty on hard work and investment.

Thankfully, Governor Parson and the General Assembly appear poised to pursue exactly that—rate reductions to Missouri’s income tax—in the upcoming special session of the legislature. Doing so would not only be welcome relief to Missourians suffering under decades-high inflation, but it would also be a great way to kickstart a bold tax-reform agenda to improve the economic prospects of every Missourian. Economic research has demonstrated that lower income-tax burdens encourage work, improve productivity, increase entrepreneurship, promote innovation, and attract people and firms from places with more punitive taxes. When we enable people to earn higher returns on their labor and investments, it should come as no surprise that we get more of both.

This isn’t theory or idle speculation. One only needs to look as far as neighboring Tennessee to see a state much like our own that has grown dramatically faster than Missouri in recent decades. One major reason for that growth is that Tennessee is one of nine states with no income tax, and its major cities do not have local income taxes. Greater economic growth is more than just a statistic. It’s more jobs and new businesses at places ranging from local mom-and-pop shops to modern tech start-ups—all driving up wages and creating ladders of opportunity. Growth benefits Missourians of all backgrounds, which is why we must seize on the opportunity to return power and money to the people through the kind of income-tax-rate reductions now being discussed.

Those who oppose these cuts look past the obvious success of Tennessee and Florida and instead bring up the specter of Kansas, which faced negative consequences in the years following its own major tax cuts. But not every tax cut is created alike, and prudent budgeting always demands running the math both on the revenues and spending sides, which is exactly what Missouri policymakers are doing carefully and seriously as they deliberate. By contrast, when Kansas cut taxes, it created a special zero percent rate for only certain forms of income (namely, LLCs, S-Corps, and other pass-through entities) and did not undertake other subsidy and spending reforms to ensure that the numbers would add up. Favoritism and bad arithmetic are bound to create problems. Not surprisingly, many businesses changed their structure to these newly tax-free entities, and Kansas state revenues fell. Kansas reduced the tax rate on pass-through income to zero, far below that of regular income. Not only did this change have little justification economically but it also greatly encouraged tax avoidance behavior through income reclassification

That is not the proposal under consideration in Missouri. Governor Parson and the legislative leadership are considering accelerating already-planned rate reductions by cutting the Missouri income tax rate from 5.3 percent to 4.8 percent—a move well justified by the enormous surge in revenues the state continues to experience. It would be even better for our state if Missouri were to push even further past 4.8 percent. The prudent course of action in that case would be to also pursue subsidy reductions and other tax and spending reforms to ensure the stability of Missouri finances for vital public services. State leadership is also considering increasing the standard deduction on state taxes, which would deliver further relief to working- and middle-class Missourians, removing some from the tax rolls entirely.

At a time of high inflation and labor shortages, putting Missouri on a faster growth track through pro-growth, pro-work, pro-investment income tax reductions could not be more appropriate. In the short term, having more money in their pockets will provide much-needed relief to struggling families and empower Missourians to achieve their dreams, whether this means saving for a house, starting a business, or donating to their communities. In the long run, taking an important step toward major tax reform signals that Missouri is open for business and no longer willing to cede ground to states like Tennessee, Florida, or Texas. If those states can attract investment and talent by rewarding hard work and entrepreneurship, then we can too.

However you measure it, Missouri has not been growing compared to other states. If the Governor and legislature succeed in passing some combination of tax rate reductions and other adjustments to our income-tax system, they will increase opportunities for all Missourians. That would be a legislative special session we could be proud of.

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But six weeks of veto rumblings rolled into a veto thunderclap early this month when most Missourians were preparing for the July 4 holiday weekend. That Thursday, the governor not only vetoed the rebates but also declared his intent to reconvene the legislature in a special session to pass an even more extensive overhaul of Missouri’s income tax:

“We have managed our state resources responsibly and our consistent investment in workforce development and infrastructure is providing a strong foundation for Missouri. Now is the time to take additional steps to help alleviate the strain on Missouri families. Permanent tax cuts that provide real relief to families, senior citizens, the working class, and small businesses every year is a better answer to the inflationary pressures we face, and we look forward to getting it done,” Parson said in the statement.

Parson’s plan includes reducing the individual income tax rate, increasing deductions and allowances for taxpayers and further simplifying the tax code, to create the “largest tax cut in state history,” according to the release.

Under the proposal, the first $16,000 of income for single filers, or $36,000 for joint filers would not be taxed at all, according to a release about the proposal from the Missouri Republican Party.

Special sessions are not unusual but they aren’t terribly common, either; the time and extra cost of bringing legislators back to the capitol often compels elected officials to put off even important reforms until regular legislative business resumes in January. That the governor won’t wait until 2023 to institute tax reform is encouraging.

As to the substance of the proposal as I currently understand it, I am broadly excited by it. Show-Me Institute analysts have long supported eliminating the state income tax, and by increasing the standard deduction for all Missouri filers while simplifying the tax code and reducing the income tax rate, the governor’s current proposal sets out a straightforward framework for dumping the tax over time from both “the top” and “the bottom” of the tax code. My hope is that the legislature’s plan also includes at least a handful of triggers for further tax relief in future years.

I’d be remiss, of course, if I didn’t also suggest that income tax reform should be only one of perhaps a handful of special session topics that could be addressed in the session. Notably, one major regret the governor admitted to after the legislative session was that curriculum transparency legislation didn’t get done this year; this seems like an easy topic to address when the legislature gets back together.

It remains to be seen when exactly the special session will be called, but the odds are it will be called concurrently with the veto override session scheduled for September, when legislators will already be back at the capitol. Hopefully, the special session leads to good tax policies for the state at a minimum, and ideally an opportunity to call up additional topics. Fingers crossed.

The post Governor Parson Opens Door to (At Least) One Special Session appeared first on Show-Me Institute.

An income tax cut is basically the gift of money. Taxpayers would get to keep more of their hard-earned money to spend or save in any way that they want. That means more opportunities for taxpayers and more money that can be spent at Missouri businesses. And it’s the gift that keeps on giving, because you’d get this “extra” money year after year.

This would not only be an individual gift, but also a gift to Missouri’s economy. Income taxes are destructive to growth and disincentivize working. For a number of reasons, Missouri’s economy would be better off if the state relied more on other forms of taxation for revenue.

In recent years, Missouri lawmakers have taken steps to lower the individual income tax. The “Wayfair” bill in 2021, for example, added a reduction of the top income tax rate by 0.1 percent in 2024 and two triggers to eventually lower the top rate to 4.8 percent. But it’s not time to take our foot off the gas. Other states (like North Carolina) are implementing tax cuts, and Missouri should follow suit to support taxpayers and stay competitive.

In the mass of pre-filed bills, I know of at least one that would reduce the income tax, but it’s difficult to predict what will happen in Jefferson City in 2022. If lawmakers really want to give taxpayers a gift (albeit a late gift, given the timing of the legislative session), they’ll consider further income tax cuts this session.

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Colorado’s governor defended his call for an income tax rate of zero with basic economic theory. When you tax something, you make it more expensive and discourage buying or doing it. With sin taxes such as cigarette taxes, the tax is added to do just that—make the price of cigarettes higher and discourage cigarette smoking.

But is that really what we want to do with income taxes? Do we want to discourage people from earning income? Show-Me Institute researchers have asked these questions for years as they’ve written about Missouri’s income tax and the earnings taxes in St. Louis City and Kansas City. The individual income tax accounted for more than 26 percent of Missouri’s total revenues in 2020 (Colorado’s 4.63 percent individual income tax contributed almost 20 percent of the state’s revenues in 2020). Given the adverse incentives created by income taxes, it would be in Missouri’s best interest to rely less on this harmful tax.

Missouri legislators have taken steps to lower the state income tax, perhaps indicating a general acknowledgment of the negative effects of income taxes. For example, the online sales tax bill from earlier this year includes mechanisms to incrementally lower the top state income tax rate to 4.8 percent. This is a great step in the right direction, but we are still far from zero. As Polis said: “We can find another way to generate the revenue that doesn’t discourage productivity and growth . . . and we should.” I agree, and I hope that Missouri lawmakers share this sentiment and continue to lower income taxes in our state.

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Witness an incredible turn of events:

We now hear the proudly progressive governors of California and New York howling in outrage at the removal of a substantial tax break for those at the highest level of income – the top 10 percent, and, especially, the top one percent.

Under the Tax Cut and Jobs Act that went into effect on Jan. 1, taxpayers may no longer count all of their state and local income tax payments, plus property taxes, as deductible expenses on their federal returns. The new law caps the deductibility of these state and local taxes (the so-called SALT deduction) at $10,000 per taxpayer. What follows is a rough calculation of how the cap will impact people at several different levels of income (focusing only on California, where local income taxes are not as important a factor as they are in New York, and disregarding property taxes).

Based on California income tax tables, a couple earning $150,000 in 2018 will owe $8,797 to the state of California – with the consolation of knowing that every cent will be deductible. The couple will save about $2,000 on their federal return.

A tipping point occurs at $164,000 in adjusted gross income. Exceeding that, a California couple filing jointly runs out of cap room and gets no further benefit from the SALT deduction.

The top one percent in California starts at about $500,000, according to the latest available data from the Internal Revenue Service. With that income, an entry-level couple in the one percent club will owe $41,347 to the state. Since all but $10,000 of the state tax is nondeductible under the new law, it has the effect of bumping up the adjusted gross income on their federal return by $31,347. Applying the top federal rate of 37 percent to that sum, the couple will owe an additional $11,598 to Uncle Sam.

The average income for families in the top one percent in California is $1.6 million, or more than three times the starting income. So how does the “average” ultra-rich family fare under the new tax regime? In 2018 it will owe $165,072 to the state – with a whopping $155,072 no longer counting as a deductible expense. Consequently, the family will take a hit of a little more than $57,000 in what it owes to Uncle Sam.

In a nutshell, the top one percent of filers in California are about to lose a huge tax break. No longer will they be able to reap one dollar in federal tax savings for every three or four dollars going to the state government.

No wonder the governors of the two states are worried. At 13.3 percent, California has the highest marginal income tax rate of all the states. New York State’s top rate is 8.82 percent, and that jumps to 12.7 percent in New York City. Each state garners nearly 50 percent of its total income tax revenues from the top one percent of earners.

Who has compensated for the outsized deductions that the highly paid denizens of Hollywood, Silicon Valley, and Wall Street have been able to claim on their federal returns due to exceptionally high state and local taxes?

Taxpayers in low-tax states and less affluent regions have done so. In the process, they have helped to subsidize the growth in public spending that has occurred in Sacramento, Albany, and New York City.

The situation will soon change. In early 2019, when people file their local, state, and federal tax returns for the 2018 tax year, the cross-subsidies, of a reverse Robin Hood nature, will largely disappear.

At the same time, taxpayers outside the top ten percent of filers will appreciate the positive impact of a near doubling in the standard deduction – to $12,000 for individuals and to $24,000 for couples. According to the nonpartisan Tax Foundation in Washington, D.C., a married couple with two children and a combined adjusted income of $85,000 will reap a $2,254 tax savings in 2018 as a result of provisions in the new law.

So, what about the vociferous complaints coming from progressives, who say that the new law only serves to make the rich richer and does nothing to help working people?

But the tax tables tell an entirely different story.

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