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FORWARD MOVEMENT

INCOME TAX REFORM: HJRs 173 AND 174

Lawmakers approved a constitutional amendment for voter consideration that would authorize the eventual elimination of Missouri’s individual income tax. The measure represents the most significant advancement of income-tax reform in Missouri in years and ensures that the future of the state’s tax system will ultimately be decided by voters.

• Asks Missouri voters to decide whether the state should pursue eventual elimination of the individual income tax
• Allows lawmakers to modernize Missouri’s sales tax system as part of future income tax reductions
• Requires local governments receiving additional sales tax revenue to reduce other local taxes

OCCUPATIONAL LICENSING: SB 1233

Expanded opportunities for experienced professionals moving to Missouri by creating a pathway to temporary licensure for individuals with at least three years of work experience in a profession from a state that does not require a license for that occupation.

HEALTH CARE: HB 2372, HB 2974, SB 878, AND SB 1233

• Removed outdated barriers, allowing more patients to establish provider relationships remotely
• Eased restrictions on prescribing medications through telehealth
• Expanded access by allowing providers licensed through reciprocity to serve Missouri patients statewide
• Expanded pharmacist authority to test and treat for common illnesses and prescribe certain medical devices

MORE WORK TO BE DONE

Despite extensive discussion, several major policy proposals were left unresolved at the close of the 2026 legislative session.

EDUCATION REFORM

Legislation intended to address Missouri’s reading crisis passed in the House but died in the Senate. Meanwhile, 42 percent of the state’s fourth graders can barely read—the worst results in 20 years.

• Literacy reform
• A–F school accountability grades

TAX AND BUDGET REFORM

• Property tax reform
• Spending restraint

The debate over Missouri’s future did not end with the adjournment of the legislative session. Voters will soon weigh in on income tax reform, and lawmakers will return next year facing unresolved questions about education, taxation, and government spending. The most difficult reforms still lie ahead.

Download a copy of the report here.

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As a recent op-ed in the Wall Street Journal reports, high-tax states continue to bleed residents and income. Between 2022 and 2023, California lost a net $11.9 billion in adjusted gross income (AGI), New York $9.9 billion, and Illinois $6 billion. Higher earners with income over $200,000 drove much of this exodus. In Massachusetts, they accounted for 70% of outflows, doubling the 2019 share.

Meanwhile, no-income-tax states saw the largest gains. Florida added $20.6 billion in AGI, Texas $5.5 billion, and Tennessee $2.8 billion. Even non-income tax states with more frigid climes saw significant inflows, including Wyoming and South Dakota. In short, states without income taxes dominated the top destinations for both people and wealth.

Missouri, with its current 4.7% top individual income tax rate, sits in the middle of the pack. While we are not a major loser like California or New York, we are far from the magnet status of Florida or Tennessee. Drawing upon IRS migration data, past Show-Me Institute reports have shown that Missouri has consistently lost more people and more income than it gained. This has been particularly the case among working-age and higher-earning households seeking better economic climates.

These national migration patterns emerge at a pivotal moment for Missouri. State lawmakers recently approved HJRs 173 and 174, a proposed constitutional amendment backed by Governor Mike Kehoe that would ask voters to authorize the gradual phaseout of the state’s individual income tax. If approved, the general assembly would begin reducing the tax as revenues grow and would have the authority to speed up the process while modernizing Missouri’s outdated sales tax code.

Eliminating the income tax would align Missouri with proven winners in the migration data, making our state far more attractive to high earners, businesses, and young professionals—key drivers of growth. Moreover, we sit right next door to Illinois, which, while losing top earners at a breakneck pace, is also ranked the least friendly state for middle-class earners according to one report.

The pattern is clear. People and capital continue to flow to states with lower tax burdens and pro-growth policies. Missouri has the chance to join those states. By modernizing our tax code now, we can shut off the outflow of the past and build a more prosperous future.

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They say that the best time to plant a tree was 20 years ago, and the second-best time is now. That about sums up my opinion on the City of St. Louis’s one-percent earnings tax, the continuation of which is before St. Louis voters on the April ballot. The best time to start phasing out the earnings tax really was 20 years ago, and the second-best time is still now.

The 20 years in the saying is particularly appropriate in this case, as the Show-Me Institute released its first study on the earnings tax almost exactly 20 years ago. Professor Joseph Haslag, then at the University of Missouri, documented how the earnings tax reduces overall income and employment in the city by encouraging businesses and individuals to locate outside of the city. Additional studies conducted by Show-Me Institute analysts and others have found similar results regarding the harms of local income taxes generally.

Haslag didn’t just demonstrate the harm of the earnings tax; he also recommended a strategy to replace it in order to maintain necessary city services. Haslag suggested changing state laws to allow St. Louis to institute a land tax, which is simply a property tax on the value of the land only. Pittsburgh is one city that had beneficial results from implementing land taxation in the 1980s. Alas, while land taxes are popular with economists and fiscally beneficial, they are politically unpopular to say the least. Needless to say, land taxes have never been adopted in St. Louis (nor has state law been amended to allow them). But the harms of the earnings tax have continued to help drive St. Louis’s population and economy lower, and those fiscal harms were exacerbated during the pandemic.

An easier change (legally, if not politically) than a land tax would have been to start phasing out the earnings tax 20 years ago while increasing a combination of property and sales taxes over time to replace the lost revenues (while cutting spending where possible as well). Poor decision-making over the past two decades has made that already-difficult change almost impossible. Damaging special sales taxes such as community improvement district (CID) taxes are now ubiquitous throughout shopping areas in the city. Primarily used as a smokescreen for harmful corporate welfare, CIDs and other special sales taxes have driven sales tax rates sky high. While the sales taxes have gone up, commercial property values have plummeted. According to the St. Louis Business-Journal, downtown St. Louis office buildings have lost 19 percent of their assessed value since 2019, and even more if you go back further. The largest office building downtown, the AT&T building at 909 Chestnut, paid $5.5 million in property taxes in 2009. It paid just $200,000 in 2024. While that is the most extreme example, similar examples can be found throughout downtown.

The economic situation in the city was already bad, and the tornado that hit in May made it even worse. It was the type of disaster that could make people consider radical changes, and perhaps the land tax is the type of radical change the city needs. (For the record, the Show-Me Institute’s offices were destroyed in the tornado, and while we’re a nonprofit, our office building is subject to property taxes.)

As large parts of the Central West End and the Northside are still recovering from the tornado, St. Louis city government has commendably allowed homeowners with damaged homes to reduce their tax payments, but the long-term impacts on city tax revenues may be significant. The population of New Orleans still hasn’t recovered from Hurricane Katrina and, while the damage to St. Louis was not that severe, the risk is the same.

I suggest it is time to change state law to allow for a land tax, including on land owned by larger “nonprofits” like Barnes Hospital. The land tax could be imposed on the value of the land throughout St. Louis at a level that would gradually increase to make up for revenue lost as the earnings tax is phased out over a period of 10 years (or more). (Other changes would be necessary, including ending the tax subsidies the city gives out.) What makes land taxation so beneficial is that as homeowners and businesses rebuild their damaged property, they aren’t hit with higher taxes for the home or building. The tax is set to the land, which can’t be altered, rather than the building. So, return to the city, rebuild your home or business, make it even larger—do whatever you want—and you won’t be punished with higher taxes.

Pittsburgh in the 1970s was experiencing economic difficulties just as St. Louis is now. Land taxation helped spur investment in Pittsburgh, and it could have the same effect on St. Louis. The city has been hemorrhaging population, jobs, and wealth for decades. Honestly, at this point in its history, what does St. Louis have to lose?

The post It’s Time to Phase Out the Earnings Tax. Honestly, Nothing Else Has Worked . . . appeared first on Show-Me Institute.

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.

House Bill 2058 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 HB 2058 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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In his January 30 op-ed for the Post-Dispatch, Kansas political scientist Michael Smith called Governor Mike Kehoe’s proposal to cut income taxes in Missouri a “near carbon copy” of Governor Sam Brownback’s 2012 income tax cuts in Kansas.

But Kehoe’s proposal for Missouri has large and important differences from Brownback’s. It isn’t a “carbon copy” at all.

The single largest flaw in Brownback’s tax cut was a peculiar change that eliminated all income taxes on “pass-through” business entities such as limited liability corporations (LLCs) without changing the tax code for other types of businesses. Even the right-leaning Tax Foundation criticized the provision at the time. Put simply, it didn’t encourage investment; it ended income taxes for one type of business while keeping them for others.

Not surprisingly, many businesses changed their corporate structure to suddenly become pass-through entities. The Tax Foundation found that over 390,000 entities claimed the exemption by 2015, more than double what was projected. These businesses didn’t invest in the state, hire more workers, or do anything other than change their legal status. Tax revenues declined significantly, and little growth followed.

Kansas also made critical mistakes in how it implemented income-tax cuts. The state slashed its top income-tax rate by nearly 30 percent immediately in 2012, with plans to cut even further. At the same time, Kansas’s elected officials failed to rein in spending. The combination of the pass-through exemption, immediate and deep rate cuts, and lack of spending discipline during this period fostered a fiscal crisis that could have been avoided. Even worse, the timing of these actions gave the state little room to adjust when projections weren’t borne out.

Kehoe’s proposal is fundamentally different. It asks Missouri voters whether they want to eliminate the income tax. If they do, the state can then expand and adjust its sales tax to replace the lost revenue. While many details remain to be finalized (and Missourians have every right to be skeptical while awaiting those details), the plan ensures that income tax rates can only be lowered after meeting revenue benchmarks, meaning Missouri would only cut taxes when it has the fiscal capacity to do so.

Setting aside the phasing out of the income tax, addressing Missouri’s outdated sales tax system is long overdue. While states nationwide are broadening what they tax, Missouri’s system remains narrow, with much of what is sold today escaping taxation entirely. Larger exemptions like home sales and healthcare services might make sense, but other current exemptions clearly don’t.

When you buy a book in person at Barnes & Noble or have the same book delivered to your house by Amazon, you pay the sales tax. However, when you buy the same text as a download to your Kindle, you pay no sales tax. Correcting such inconsistencies in Missouri’s tax code can level the playing field while expanding the sales tax base at the same time.

Opponents can point to Missouri’s western border all they want, but Missouri has other neighbors besides Kansas. Look at Iowa, Oklahoma, and Arkansas, which have all cut income tax rates significantly in recent years without any of the issues Kansas had. Look to our southeast border to see Tennessee, a state that has been growing rapidly for years thanks, in part, to having no state income tax. This isn’t surprising, as decades of economic research have shown consistently that states without income taxes grow faster economically than those with them.

As the Tax Foundation, which was highly critical of Kansas’ tax cut, wrote in 2024 about the larger picture of state tax cuts between 2012 and 2022:

In fact, far from tax cuts precipitating a Kansas-like crisis, tax collections have risen more on average in the past decade in the 25 states that cut income taxes (31.9 percent in inflation-adjusted terms) than in the four states and D.C. that raised them (27.8 percent).

The lesson from Kansas isn’t that eliminating the income tax is a bad idea, it’s that implementation matters. There’s no doubt that states without income taxes are growing faster than Missouri, and our state needs a new approach to keep pace in the national competition for families and businesses. Voters deserve the full picture, not an overly simplistic “Kansas” bogeyman, when debating our state’s tax future.

The post Missouri Doesn’t Have To Be Kansas appeared first on Show-Me Institute.

David Stokes, Elias Tsapelas, and Avery Frank join host Zach Lawhorn to outline what a responsible plan to eliminate Missouri’s income tax should include, from revenue triggers and spending restraint to rethinking other taxes. They also break down St. Louis County’s Bill 182 expanding prevailing wage and DBE mandates, Independence’s proposed TIF package for a new Wally’s gas station and what it says about corporate welfare, Missouri’s early literacy crisis and reforms like a universal third grade reading screener, mandatory retention, and banning three cueing, and what they are watching next on prefiled tax bills, data center policy, and rising property tax bills across the state.

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Timestamps

00:00 Introduction to Missouri’s Income Tax Elimination Plan
02:52 Strategies for Reducing Income Tax Reliance
05:19 Understanding Missouri’s Tax System
08:26 The Importance of Competitive Tax Policies
10:53 St. Louis County’s Prevailing Wage Bill Discussion
13:45 Economic Implications of Tax Subsidies
16:24 Independence’s Wally’s Gas Station Development
19:28 The Flaws in Tax Increment Financing
20:20 Addressing Early Literacy in Missouri
27:54 Looking Ahead: Legislative Priorities

Produced by Show-Me Opportunity

The post Eliminating Missouri’s Income Tax, Subsidies for Gas Stations, and Early Literacy Reform appeared first on Show-Me Institute.

The new state law creates three types of counties for property taxes:

1)        Five percent counties: These counties are made up primarily of Missouri’s smaller, rural counties. In these counties, upon local voter approval, a homeowner’s property tax liability can go up by no more than the lower of five percent or the national inflation rate during reassessment, unless voters approve tax rate increases or the homeowner improves their property. There are 75 counties in this category.

2)         Zero percent counties: These counties are made up primarily of mid-sized and suburban Missouri counties. In these counties, upon local voter approval, a homeowner’s property tax liability cannot increase at all during reassessment unless voters approve tax rate increases or the homeowner improves their property. There are 22 different listings for counties in this category.

3)         “Unaffected” counties (my term, not language from the bill): These counties are primarily Missouri’s large urban counties or counties in central Missouri, including the Lake of the Ozarks area. These 17 counties and the City of St. Louis are not included in this legislation and their tax and reassessment system will continue unchanged. It is worth noting that Jackson County, which has had by far the worst administration of assessment and tax collection in recent years of any Missouri county, is unaffected.

There are many reasons why these substantial changes to the system are bad, but the first one is that, in general, property taxes are the least harmful tax for economic growth. So, if you want to create a tax system that encourages greater economic opportunity for all Missourians, the property tax is the last tax you should focus on. Furthermore, these changes will almost certainly lead to greater governmental reliance on income taxes (mostly through the state’s foundation formula for school funding), which is exactly the wrong way to go about this.

Here is a chart I like to share. It includes four major economic studies of tax policy. The conclusions are obvious. Property taxes, in general, are the least harmful for economic growth and income taxes are the most harmful. Why Missouri would be severely limiting property taxes in many counties in a manner that will increase dependency on income taxes is beyond me. It may make for good politics. It is not good tax or economic policy.

Not all property taxes are the same, of course. Property taxes focused on the value of the land are the best, and we need to expand that (i.e., land taxation) in Missouri. Property taxes focused on homes and buildings are next best. Missouri makes heavy use of personal property taxes on cars, boats, etc., and those taxes on mobile assets are less beneficial and should be phased out. Finally, personal property taxes on business and farm equipment are harmful, and should be ended. (The final category makes up a very small part of the property tax base, so ending it would not be difficult.)

Future posts will discuss the constitutional problems with this bill, the harmful effects of favoring current homeowners over future homeowners, a discussion of Charles Tiebout and his theories, and more. For more information, please see my testimony from the special session, these policy studies on this issue of property taxes and assessments, and related commentaries.

The post Why the New Property Tax Rules in Missouri Are Bad, Part 1 appeared first on Show-Me Institute.

Taxes are going down, right? That’s a good thing, right? My answers are “yes,” and a hesitant “maybe?”

I like low taxes, but I like low taxes evenly spread out for everyone. How we tax is almost as important as how much we tax. Whether they are income, property, or sales taxes, and whether they are at the national, state, or local government level, too often lately we are cutting taxes for some people in some instances for some things. These highly targeted cuts might work out overall, but often they are done because they make good politics, not good public policy. Taxes should be broadly based for several reasons, including fairness, certainty, and administrative ease. This is the opposite of what is happening.

Congress seems likely to pass changes to federal income tax rules that would exempt income from tips and overtime from taxation. This is absurd. The airport skycap who works a 50-hour week should be admired for his hard work, but his tax treatment should not be any different from that of the woman processing tickets behind the airline counter for 40 hours per week. This proposal treats things that are, essentially the same—regular, tipped, and overtime wages—as entirely different things for taxes. That’s a dangerous road to travel.

Staying in the same realm, one of the most hotly contested items in the ongoing federal tax debate is whether to raise the state and local tax (SALT) deduction. Currently, the SALT cap is $10,000 per household. This means that you can deduct state income taxes, local property taxes, etc., up to $10,000 from your federal income taxes. Currently, congressmen from higher-tax states are fighting to significantly increase the SALT deduction cap. The latest number is $40,000. That means that high-tax states would be able to continue increasing taxes knowing that their taxpayers would in part be subsidized by other federal taxpayers. California (or any high-tax state) would get to keep the tax money, and Missouri taxpayers would get to subsidize California taxes. This is preposterous.

The same things are happening locally in Missouri. A few years ago, legislation was passed allowing counties to freeze the property taxes of senior citizens. Scores of counties in Missouri have since done so. As a result, the wealthiest sector of the population gets its property taxes frozen upon turning 62. Younger families working and raising kids will see their taxes continue to rise, and those taxes will almost certainly rise more than they otherwise would have without the senior tax freeze. This is insane.

Another example includes Missouri’s sales tax rules. The legislature passed a law removing sales taxes from diapers and feminine hygiene products. We can all sympathize with the aim here. But adding more products to the sales tax exemption list will increase pressure to raise sales tax rates (or institute entirely new sales taxes) on the other products that are still taxed. Your diapers will have cost less due to reduced taxes, but your infant’s clothes will cost a little more with the new sales taxes on them.

Each of these targeted tax changes will have unseen, harmful effects. High-tax states will continue to get away with tax increases if the SALT deduction is raised. More workers will see their pay come via high-pressure “tips” instead of typical wages. Seniors will avoid beneficial downsizing simply for tax purposes. As fewer goods are subject to regular sales taxes, new special taxing district sales taxes will be added onto everything else. These targeted taxes will likely succeed for purposes of short-term politics, but they are going to fail by any longer-term fiscal measure.

Is there anything going right with tax policy? Sure. Keeping the federal tax rates from rising by passing those parts of the “big, beautiful bill” will benefit everyone, although the entire plan needs further spending cuts. In Missouri, the state income tax rate has been steadily coming down for everyone over the past decade as revenue targets are hit. Finally, the sales tax base has been broadened by taxing online sales and legal marijuana in the past few years. All of those moves are consistent with good tax policy.

If you are a wealthy California homeowner over 62 who still works for tips on overtime while buying diapers online for your Missouri grandkids, you may benefit from all of these changes. But if you are like most people you will benefit from maybe one while being hurt by the others. Of course, the one you benefit from will be clear and obvious, while the multiple ways you are harmed will be small and harder to detect. You will think you’re a winner in this game of tax politics. But in reality, you won’t be, and neither will the government’s fiscal condition.

The post The Wrong Direction on Tax Policy appeared first on Show-Me Institute.

When the Emperor was trying to convince Anakin Skywalker to come over to his side in a regional political dispute, he famously told him, “I can feel your anger. It gives you focus. Makes you stronger.” Right now, we could use some of that well-focused anger when deciding on local tax increases in Missouri.

I get it. People hate property taxes. That’s not just conventional political wisdom—there are actually data to back that up. In one poll, 69% of respondents said their local property tax was too high, and 59% said it was unfair. In another poll taken regularly through the years comparing Americans’ views on taxes, the property tax was historically the least-popular tax. However, in the most recent poll (2023), the federal income tax (34%) edged out the local property tax (29%) as the “worst tax.” If you are almost as unpopular as the most hated tax, you are very unpopular. But the property tax does not deserve such contempt.

Other than a small cadre of hard-core political leftists, nobody really “likes” taxes, thankfully. People should be ambivalent about parting with their own money. They should want to get value for their tax dollars and expect that they be spent effectively. Most of all, they should be hesitant to pay higher taxes just because politicians want them to.

Not surprisingly, people like to tax other people more than they like to tax themselves. Because of our Hancock Amendment, residents get to vote on almost all tax increases in Missouri. I have closely followed hundreds of local tax increase campaigns around the state, and every campaign for a new sales tax, new hotel tax, or earnings tax renewal follows the same playbook. “With this tax increase, we can make sure those shoppers/tourists/commuters (pick one)  pay their fair share.” Convincing voters that other people are going to help fund their new service is a great way to get voters to fund what the government wants and not what the people need. Voters are more discerning on property tax increases because they know they are going to pay for it, and that’s a good thing.

Municipalities in Missouri depend less on property tax revenues than cities in any other state. That fact would probably surprise many readers. Cities depend heavily on various sales taxes, and our two largest cities depend primarily on local income taxes that also apply to nonresidents. The local governments that depend entirely on property taxes do so because they have no other choice under state law. Trust me, if they had a choice, every school district in the state would be operating a new casino with its own special sales tax right next to the high school.

All taxes impact economic growth. Poorly constructed tax systems that waste money on ineffective projects or corruption are bad for growth. Well-constructed systems that efficiently fund important public needs are good for growth. The trick is to get more of the latter and less of the former. The property tax goes to the local services that people see and use every day. When those services are well run, the tax is capitalized into higher home values, which everyone wants except at tax time. When those local services are poorly run, it hurts the value of your home, which everyone hates (also except at tax time). While any tax can be harmful if set too high, economic research indicates that local property taxes at reasonable levels harm economic growth less than other taxes, particularly destructive local income taxes.

If a local city or school district isn’t providing the services you want for the taxes you are expected to pay, it isn’t that hard to move to a different community. Families move for better school districts all the time. Older people regularly downsize to smaller homes with the resulting lower taxes and, often, within lower-performing school districts (e.g., The Gatesworth in University City). Variances in services and quality in a property tax system give people options to choose what is best for them and their families at different points in their lives. (The senior citizen property tax freezes expanding around the state remove that pressure in a contrived way that hurts communities just as much as it may help individual seniors.)

None of this is to say that the property tax system in Missouri doesn’t need reform. It’s a two-part system: assessments and taxes, and the assessment part definitely needs improvement. Electing the assessors in Jackson County and the City of St. Louis is a good place to start. Agricultural property taxes are all out of whack. The taxes on farmland are too low, while the taxes on grain, livestock, and farm equipment are absurdly inefficient. Local governments probably spend more money calculating the livestock taxes than they receive by collecting them. Business property taxes need reforms to protect commercial property from the same flaws of sales, hotel, and earnings taxes: voters targeting businesses to fund services that primarily benefit residents.

Why do people have a particular disdain for property taxes? Perhaps it’s because it’s the only tax many people pay all at once, so it seems to hurt more. Perhaps people buy into the silly argument that you never really own property if you pay a tax on it. Whatever it is, the fact that people dislike the property tax means voters are more careful about approving property tax hikes than other types of tax increases. As a result, governments need to make stronger arguments and show results to justify property taxes in the first place. The “focused anger” of voters, to paraphrase the Emperor again, is precisely why cities and counties in Missouri should depend more on property taxes, not less.

Hopefully, though, we will stop short of going fully over to the dark side. I can’t even imagine how high the taxes on a fully operational Death Star would be.

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Kehoe committed to reducing Missouri’s income tax, which is welcome. Missouri needs to be more competitive with the states around us who are also working to attract families and businesses—including those already living and working in Missouri.

But he also introduced a budget larger than previous years, and detailed a number of places where he wanted to increase spending. Those increases included a number of items regarding public safety, such as $10 million for the Blue Shield Program, $2.5 million to support the sheriff’s retirement system, a new crime lab in Cape Girardeau, and boosting spending on the Blue Scholarship Program for law enforcement basic training.

Kehoe indicated he wanted $10 million to support childcare providers, $15 million in additional funding for career and technical centers in addition to $5 million more on an annual basis for their operational costs, $800,000 in funding for Future Farmers of America, and $55 million in new bonding for state fair facilities.

Regarding education, Kehoe indicated he wanted to spend $200 million more for the education foundation formula, $370 million to fully fund school transportation, $33 million for teachers’ salaries, and $30 million in grants for rural schools.

He also asked for an additional $10 million to be spent to support Veterans Homes.

The tab comes to $53.4 billion, $450 million more than the previous year. He did not mention any cuts to spending. But he did commit to ending the state’s income tax, “once and for all.”

All the programs the governor wants to support may be good and worthwhile. But it doesn’t take an experienced budget analyst to see the problem: one cannot continually increase spending while promising to zero-out an income stream that accounts for almost 60 percent of the state’s general revenue according to the state’s Office of Administration (see page 25).

Missouri’s financial position is all the more difficult because Kehoe’s predecessor, Mike Parson, spent money like a blue state progressive.

Reducing Missouri’s income tax to zero is necessary because of the economic benefits that will accrue. But if the effort is to be successful, Missouri needs to reduce spending. A lot.

I do not envy the incoming governor and those tasked with cutting spending—but there is no other way forward.

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As I wrote about a few weeks ago, Missouri is also facing a demographic decline. Recent college graduates or businesses looking to relocate will be more likely to choose a state with a promising economic outlook. When I wrote about demographic decline in St. Louis, I mentioned that Austin, Texas, and Orlando, Florida, have experienced substantial growth. One likely reason for these cities’ success in attracting new residents is their lack of a local or state income tax, which serves as an incentive for businesses and individuals to move to those cities.

So what can policymakers do? Show-Me Institute analysts have written extensively about the benefits that an income-tax cut could have for Missouri. States such as Texas, Florida, and Tennessee have cut their income tax to zero and also consistently fare well in ALEC’s economic outlook and performance rankings.

While Missouri has made incremental progress on cutting taxes, we still lag behind the true national leaders. This year’s legislative session is almost over, and so far we haven’t seen any significant tax reforms become law. Lowering taxes could help both our economic and demographic woes. But we need more urgency from our elected officials on this issue, or Missouri will only continue to fall further behind.

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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.

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[O]nly 71 entities used these tax credits in the last full year they were active. That’s right, just 71! Forgoing millions of state tax dollars in favor of so few entities seems like the opposite of the governor’s sentiment in the tax rebate discussion. I’d simply ask the same logic to be applied to agricultural tax credits. Research and experience have shown us that these programs do not work. Instead of using the special session to double down on bad policies, a better and fairer solution is to lower taxes for everyone.

Indeed, as Show-Me Institute analysts argued for with SBs 3 & 5, generally the best kind of investment government can make is in “the market.” Like investors, government certainly has the power to make big bets on small industries, but the prudent approach with taxpayer money is to let all Missourians keep and invest their money through tax cuts, rather than dole out more and more cash to rent-seeking special interests.

The good news is the legislature did pass a broad-based tax cut bill in the special session. Quite a treat for taxpayers! The bad news is it also passed the tax credits we warned about to benefit special interests in the agricultural industry. Quite a trick! Boo.

Show-Me Institute staff have noted the problems with “economic development” tax credits for years; those problems include their haphazard creation and the way in which they, in practice, serve to gild the coffers of a host of powerful special interests in the state. Those objections and criticisms are as applicable now as they’ve ever been. It doesn’t matter if tax credits such as these go to large-scale property developers in cities or large-scale farmers in the countryside—it’s bad policy, and wrong, to force the rest of the taxpaying population to underwrite the profits of these private actors.

Taxpayers shouldn’t have to have to endure the “tricks” of tax credits to get the “treats” of better tax policy through income tax cuts. At some point, legislators need to gather the courage and say no to this constant rent seeking, once and for all.

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Then as the summer began, rumors percolated that a special session would be called to reduce income taxes, and in July, Governor Parson declared his intention to bring the legislature back for that purpose. Show-Me Institute experts supported that move. The special session gaveled in September, and the governor signed that tax cut bill—SBs 3 & 5—into law yesterday.

The details of the tax cut bill accord with the original recommendations for reform from Institute analysts in July, so you may be unsurprised that I’m keen on the final product. Starting next year, the income tax will drop below 5% for the first time, to 4.95%, and then (subject to revenue triggers) will migrate toward 4.5% over a period of years. The bill also modestly cuts taxes from the bottom alongside these top-rate cuts, exempting the first $1,000 of a taxpayer’s income from taxation. All in all, a good strategy.

That said, I sure hope future legislators plan on accelerating the process sometime in the next few legislative sessions. At the current tax cut pace, the income tax would be due to be eliminated in roughly 50 years . . . assuming tenth-of-a-point cuts continue to be scheduled in the future and happen on time from the 4.5% rate. Knowing the way the legislature operates, the issue of income tax cuts may not be broached much in 2023, but the legislature should consider shortening the timeline for such cuts considerably, and soon.

That said, congratulations to the governor, the Senate, and the House for getting this across the finish line. While we look askance the agricultural tax credits that were passed alongside the tax cuts, the income tax cuts were needed and at least partially saved this year’s legislating cycle. Hopefully next year another special session won’t be required because the regular session ends up being very productive. Fingers crossed.

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