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.

The post A Big Step toward Ending the Income Tax 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.

The post Another Crack at the Income Tax appeared first on Show-Me Institute.

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.

The post Would an Income-tax Cut Benefit Missouri? appeared first on Show-Me Institute.

The West Virginia Legislature just passed a sweeping school choice bill. The bill allows 90 percent of West Virginia children to receive $4,600 in an education scholarship account (ESA). These ESAs can be used for private school tuition, tutoring, education therapies, or homeschool curriculum. If the governor signs this bill, it could be a game changer.

West Virginia’s governor also announced a plan to eliminate the state income tax. The plan will be paid for in a combination of ways, including raising sales taxes, raising consumption taxes on alcohol, and reducing or eliminating tax breaks for the oil and gas industry.

All of the sudden, West Virginia, which has had a declining population since the 1950s, could look pretty attractive to young families who aren’t thrilled with the West Virginia public schools and would prefer to DIY their own plan. It’s going to look pretty attractive to high-income earners who can now work from anywhere. And it’s going to look pretty attractive to active folks who value a small-town atmosphere with a low cost of living. These are groups that can engage with their communities and help solve entrenched social problems. These are groups that Missouri would be wise to pursue.

Missouri also has great amenities. We have delightful small towns, beautiful state parks, Lake of the Ozarks, and Branson. Unfortunately, too many legislators from these very same areas are solidly against school choice in any form. They need the support of teachers to get elected and that, so far, has meant standing firm for the status quo and only the status quo. The fact that the young people who do go off to college often don’t return must not be considered. The fact that young families aren’t gravitating to these communities is seemingly being ignored. The fact that knowledge workers will go to states like West Virginia, Colorado, or Florida must not be a threat.

We keep this attitude at our peril. Post-pandemic, many people are thinking long and hard about where and how they want to live. Missouri should be setting itself up to be as attractive as possible.

The post Almost Heaven appeared first on Show-Me Institute.

The post Missouri’s Tax Landscape appeared first on Show-Me Institute.

Economists Arthur Laffer, Stephen Moore, and Erwin Antoni predict that this tax increase will mean the migration of 700,000 fewer people, 237,000 fewer jobs created, and a $25.5 billion reduction in personal income growth in Arizona over the next 10 years. These predictions are staggering, and while they are predictions, any negative effects even close to these would be detrimental to Arizona’s economy.

Despite the evidence of the negative effects of income taxes, especially relative to other forms of taxation, old habits die hard. State and local revenues are expected to take a hit from the pandemic and economic shutdown, so income tax increases may be on the minds of many lawmakers. In Missouri, we’re already seeing localities toying with the idea of tax increases (though not necessarily income tax increases). Income tax increases have very real economic consequences and our state cannot afford them. In this case, Missouri shouldn’t follow in Arizona’s footsteps.

The post Missouri Shouldn’t Make Arizona’s Tax Mistake appeared first on Show-Me Institute.

New York Governor Andrew Cuomo, who makes his livin’ off of the people’s taxes, held a press conference to bemoan the $2.3 billion drop in state income tax revenue in December and January alone. Cuomo suggested that this was the result of the 2017 tax reform bill which reduced the amount of state taxes one can deduct from one’s federal tax burden. As a result, states with high income taxes, like New York and California, fear that their wealthy residents will flee to lower tax states like Florida. As Steve Miller might say,

They got the money, hey, you know they got away
They headed down south and they’re still running today
Singin’ go on take the money and run

This should serve as an important reminder to public officials at every level, including the Missouri General Assembly and policymakers in St. Louis and Kansas City, that people do make choices based on tax burden. The San Francisco Chronicle is reporting that 53 percent of Californians want to leave the state in part due to the high cost of living, impacted by high income taxes.

As we’ve noted numerous times before, taxes in Missouri are too high. If Missouri wants to attract residents, employers, innovators—or anyone—policymakers must be better stewards of taxpayer dollars and provide basic services at the lowest possible cost.

The post Go On Take Your Money and Run appeared first on Show-Me Institute.

The St. Louis Post Dispatch cited an analysis of the impact this change could have on state coffers which found that Missouri tax revenue could drop by as much as $42 million dollars once all private school parents open these accounts and route their child’s tuition through them in order to reduce their state taxable income. That amount is dramatically higher than the likely reality, because it depends on several conditions being met.

First, every current private school student would suddenly have to have one of these accounts with enough funds to cover tuition. Second, in order to take the maximum deduction, all private school students would need to have married parents who file their taxes jointly. And third, all of those parents would need to have a marginal tax rate that is higher than the average for the state.

It is more likely that the impact would be about $32 million. We get this by multiplying the number of students enrolled in private elementary schools in Missouri by the average private elementary school tuition in Missouri ($6,800) and most (75 percent) private high school students by the average high school tuition of  $11,500, with the remaining 25 percent of students taking the maximum benefit allowed for a single filer in Missouri of $8,000. Further, we use the average marginal tax rate in the state, which is 3.6 percent.

And while it is unlikely that a tax break of $500 or so would be enough to induce public school parents to switch to private schools, any who did would essentially save the state money. They would pay $500 less on their tax bill, but their child’s education bill would no longer be paid for with public dollars.

It makes sense to try to anticipate the impact of federal tax reform on state tax revenue, but it needs to be done in a sensible way.

The post How Will Expanded Use of 529 Accounts Affect Missouri’s Budget? appeared first on Show-Me Institute.

THE SOLUTION: Reduction or elimination of the individual income tax.

Lowering or eliminating individual income taxes allows Missourians to increase their take- home pay, increase business investments, and encourage population growth through in-migration.

WHO ELSE DOES IT? Seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) currently have no income tax. Two other states (New Hampshire and Tennessee) levy income tax only on dividends and income from investments.

THE OPPORTUNITY: Income tax reductions could be achieved in several ways. Reductions in tax incentives and spending can, for instance, provide the budgetary space to cut taxes. Whatever the pathway, reducing an obstacle to state and personal income growth should be a high priority if we want to jumpstart Missouri’s economy.

KEY POINTS

• Missourians work hard for their money and deserve to keep what they earn.
• Income taxes penalize and discourage work.
• If you include the 1 percent earnings tax in our two biggest cities, Missouri has a top income tax rate of 7 percent, which is more than all but 17 states. Our top income tax rate equals or exceeds those of all but one of eight neighboring states.
• A real reduction in individual income taxes raises take-home pay and encourages more consumption of Missouri goods and services, making Missouri more competitive with other states in the nation.

SHOW-ME INSTITUTE RESOURCES

Essay: The 49th State: Revisiting Missouri’s GDP Sector by Sector

Essay: Taxes Matter and They’re Too High for Missouri

For a printable version of this article, click on the link below. You can also view the entire 2018 Missouri Blueprint online.

The post 2018 Blueprint: Income Tax Reform appeared first on Show-Me Institute.

THE SOLUTION: Transition toward the Earned Income Tax Credit (EITC).

An EITC is a credit that may be used to offset a worker’s state income tax liability. Proper use of EITCs could slow the growth of public welfare spending while providing material benefits to working families.

WHO ELSE DOES IT? Twenty-five states and the District of Columbia offer EITCs at either the state or local level, although the amounts and refundability of the credits vary.

THE OPPORTUNITY: Moving current public welfare dollars to an EITC will encourage self-reliance among the state’s poor while also restricting growth in public welfare spending. Not only does the EITC help working families make ends meet, but it also encourages recipients and families to find jobs and increase hours worked. Missourians can move up the economic ladder with the aid of the EITC—which can help people get off state assistance entirely, thus bringing down the cost of the credit.

KEY POINTS

• Aid to our most vulnerable citizens will be better targeted, while still providing the help they need.
• EITC recipients can build the self-esteem that comes from work.
• Public money will go toward helping families rise from poverty and escape dependence on government.

SHOW-ME INSTITUTE RESOURCES

Blog Post: Moving Missourians from Welfare to Work

Blog Post: Making Strides toward Welfare Reform

For a printable version of this article, click on the link below. You can also view the entire 2018 Missouri Blueprint online.

The post 2018 Blueprint: Earned Income Tax Credit appeared first on Show-Me Institute.

The chart below plots the average annual growth rate for each of the 50 states and for the United States as whole for the period 1997 through 2015. The good news is that Missouri’s average annual growth rate increased from 0.93 percent when computed over the 1997 through 2014 period to 1.02 percent when computed over the 1997 through 2015 period. Missouri reported a 1.29 percent growth rate in its real GDP between 2014 and 2015. No one really jumps for joy when growth rates are reported at 1.3 percent for a year; however, Missouri did manage to stagger its way one rung up the ladder, from 49th-fastest to 48th-fastest growing state economy over the period from 1997 through 2015.

Overall, the story for Missouri is little changed compared to a year ago. Since the late 1990s, Missouri’s economy has increased at half the rate of that of the United States as a whole. Eighteen years is not a terribly long time, and we all hope that Missouri’s future will be brighter. But the question remains: Why has the Missouri economy reported such slow growth over the past eighteen years?

The answer is not simple. Note that the ten fastest growing states are: North Dakota, Texas, South Dakota, Oregon, Utah, Colorado, California, Idaho, Arizona, and Oklahoma. There is no one clear feature shared by these ten states that can account for their economic success. Some of them do have natural resources and have benefitted from being able to dig a hole in the ground and extract things that are valuable to the rest of the world. But that is not the only explanation. For example, Arizona, Idaho, Oregon, and Utah (at least) do not fit the oil/natural gas story. Alternatively, the ten states with the lowest growth rates are Michigan, Louisiana, Missouri, Mississippi, West Virginia, Maine, Ohio, Kentucky, Illinois, and New Jersey. No single attribute these states might have in common would account for their struggles, either.

Income tax rates cannot, alone, explain the differences in growth rates. The nine states with no earned income taxes (followed by rankings) are: Alaska (40), Florida (20), Nevada (16), New Hampshire (25), South Dakota (3), Tennessee (30), Texas (2), Washington (13), and Wyoming (11). The nine states with the highest marginal income tax rates (followed by rankings) are: California (7), Hawaii (37), Oregon (4), Minnesota (17), Iowa (23), New Jersey (42), Vermont (26), New York (29), and Maine (46). The mean rank for the nine states with no income taxes is 17.8 while the mean rank for the nine states with the highest income tax rates is 25.7.

Overall, the evidence does not prove, but does suggest, that income tax rates do matter for economic growth. Of course, a host of other factors matter as well. In order to assess the role of income tax rates on growth, the ideal test would involve holding everything else constant. In other words, you would want to examine a parallel version of New Jersey, for example, but one with a lower income tax rate. Holding everything else constant, economic theory suggests that New Jersey would grow faster.

The broader message is that lots of factors that influence a state’s economic growth rate. Each state is an experiment in which tax rates, school quality, and various government services are provided endogenously by state policymakers. The bundle of policies and regulations is too large and complicated for us to identify how each one matters. And on top of the political attributes, there are the things that lie underground, or on the ground itself (or the ocean front—or lack thereof), that people living in each state can consume. All policymakers can do is to try and manage the factors they can influence in a way that will help their state grow faster.

In case you are wondering, Kansas ranked as the 29th-fastest-growing state over this period. So, why can’t Missouri grow at least as fast as its neighbor? It’s a frustrating question, because we have a Gordian knot of regulations, laws, and policies that make it difficult to determine specific causes of our stagnation. Not only have policymakers failed to move Missouri in the right direction in the 21st century, but the complexity of our state’s problems prevents us from understanding why various initiatives have failed to produce their intended results. In my view, it seems like a good time for Missouri to review its entire spectrum of policies. For instance, we have not had a constitutional convention in this state since 1947. Maybe it is time for an institutional overhaul.

The post It Could Be Worse. Not Much Worse, but It Could Be Worse. appeared first on Show-Me Institute.

Are you listening, Missouri lawmakers? This is the Ghost of Christmas Past. I am calling on you to mend your ways and adopt a whole new set of economic policies to replace the failed policies of the past two decades.

Yes, my friends, it is time for you to admit that what you have been doing—in spending billions of dollars of taxpayers’ money to subsidize commercial projects for the benefit of big, cash-rich companies such as Boeing, Cerner, Capri Casinos, Wal-Mart, and Whole Foods—has been a ghastly mistake.

In the 16 years from 1997 through 2013, Missouri has trailed every other state in the nation but one in average annual economic growth. Missouri ranked 49th out of the 50 states in growth of state gross domestic product—just ahead of bottom-dwelling Michigan.

And that is despite (or, I would say, because of) the fact that you have turned Missouri into one of the nine states considered the “corporate welfare kings of America.” According to the Mercatus Center at George Mason University, Missouri has committed more than $5.2 billion in state and local subsidies to private businesses over the past two decades. That is more than all but eight other states.

What else can I say to convince you of the urgent need for change? Well, perhaps some specific suggestions would help.

Here are five New Year’s resolutions for making Missouri a better place to live and work and grow a business:

• Stop putting the public sector cart in front of the private sector horse. That is to say, begin with the recognition that all the private sector really needs to create wealth and jobs is competition and freedom of choice. It doesn’t need central planning and controls, which have the opposite effect of stifling individual initiative and economic growth.
• Abolish the Missouri Department of Economic Development (DED) and return the money that the DED passes out in targeted tax credits for economic development (about $400 million a year) to everyone (not just the politically selected few) through broad-based cuts in the state income tax for individuals and businesses.
• Take advantage of a wealth of opportunities across the state to enlarge the private sector and shrink the public sector through privatization. That is what Arnold did recently in selling its publicly owned and operated sewer system to a private contractor for $13.2 million—allowing the city of 20,000 people to pay off $8 million in sewer bonds and devote another $5.2 million to other public improvement. Better yet, under private ownership, the sewer system will go on the tax rolls and help pay for schools and other public services.
• Make greatly increased use of tolls on Hwy. 70 and other major roadways and bridges. Tolls are an extremely efficient tax, and—as a result of new technology—they are readily collectible without toll booths or other inconvenience to people using the roadways. In fact, through variable tolls, the Missouri Department of Transportation could—at minimal cost—guarantee drivers congestion-free traffic flows at all hours of the day on major roadways and bridges.
• Finally, look to what neighboring states are doing in reorienting their tax structures and put Missouri in the forefront of states that are pursuing pro-growth, pro-economic freedom reforms.

In the Christmas spirit, I urge you to make all those changes—knowing that you will wake up shortly wanting to fix the problems that have kept Missouri from reaching its full potential.

Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute.

The post New Year’s Resolutions for Missouri Lawmakers appeared first on Show-Me Institute.

State Rep. Tom Sands, R-Wapello, chairman of the tax-writing House Ways and Means Committee, said his preference would be to examine corporate and individual income taxes while exploring ways to simplify the tax system. Senate Majority Leader Michael Gronstal, D-Council Bluffs, said any tax cuts should be focused on helping middle-class Iowans.

“We will most definitely be looking at income tax reform, making the tax code flatter and simpler,” Sands said.

Sands added he hopes lawmakers will offer “substantial and meaningful tax cuts,” although he explained it’s too early to provide a specific dollar estimate because of uncertainties over state revenue.

Iowa is not the only border state looking to make income tax changes. In neighboring Nebraska, legislators (with the help of the Platte Institute) are exploring a round of tax cuts of their own that would also chop the state’s tax on incomes. On Missouri’s southern border, Arkansas is looking to cut its income taxes too, in part by getting the state’s tax exemption culture under control.

“They’re important to you; therefore, they’re important to me,” [Governor-elect Asa] Hutchinson told the [farming] group. “But we are now reaching a point in Arkansas that we need to look beyond more and more exemptions to our tax structure, and we need to look at an across-the-board reduction of our state income tax.”

Missouri lawmakers deserved applause for finally getting a tax cut across the finish line in 2014, but as we said at the time, that small cut alone is not enough to get the state on a firm, competitive footing for the years ahead—precisely because other states in the region weren’t going to stand still on tax relief. News out of Iowa, Nebraska, and Arkansas confirm this.

And make no mistake: The support for tax cuts has never been greater in the Missouri Legislature than it will be in 2015. Legislative leaders should not sit on their hands and let the opportunity pass them by. Our neighbors certainly aren’t.

The post Iowa, Nebraska, and Arkansas Legislators Gear Up for Income Tax Cuts appeared first on Show-Me Institute.

The post $150 Million Incentive Package. 8,600 Jobs Paying $75,000 Each. State Income Tax of ~6%, Repaying the State … $39 Million? appeared first on Show-Me Institute.

If “stealing jobs” were as bad as — and essentially no different than — stealing cars or stealing horses, Texas Gov. Rick Perry might expect to wind up at the end of a rope — the traditional fate in cowboy movies for horse thieves and cattle rustlers in the Lone Star State.

While that is not about to happen, the Texas governor has clearly been having a fun time infuriating some of his fellow governors in going to their states to pitch CEOs on the idea of relocating their businesses to Texas — one of only nine states (the others being Alaska, Florida, New Hampshire, South Dakota, Tennessee, Washington and Wyoming) with no state income tax on personal income. In venturing into California, Illinois, New York and several other high-spending, high-tax blue states, Perry has made a lot of speeches and spent some $2 million in TV ads singing the virtues of “limited government, low taxes and a fair legal system.”

Perry also made two visits to Missouri — in August and again in late September. In the earlier trip, he took Missouri Gov. Jay Nixon, a Democrat, to task for promising to veto the first tax cut in Missouri’s income tax in many years. As it turned out, even with heavy majorities in both houses of the Missouri legislature, Republicans were unable to override Nixon’s veto.

“Vetoing a tax cut is the same thing as raising your taxes,” Perry said in the commercials aired in several Missouri cities. “But there is a state where businesses flourish and jobs are created — Texas.”

That brought out the usual charges of “stealing jobs” in the two big-city, liberal dailies — the St. Louis Post-Dispatch and the Kansas City Star.

But if someone is guilty of “stealing” a job, someone else must own the job. But who?

How about no one? As Harry Stonecipher, the outspoken former CEO of Boeing, liked to say, “Only the customer can guarantee your job.”

In a competitive marketplace, no one really owns a job — not the jobholder, not the company providing the job and certainly not the governor of any state. Companies naturally gravitate to — and create employment within — the jurisdictions that provide the lowest costs of production, and taxes are an important part of the cost of production.

At the end of the day, there is no such thing as “stealing” a job. Like it or not, the states are in competition with one another in trying to attract and retain businesses focused on creating the greatest value for their customers, shareholders and employees. One of the keys to doing that is keeping the “tax price” in your location below that of competing jurisdictions.

Missouri should be focused on lowering the tax burden for all businesses. The best way to promote growth (and compete for jobs) is to get rid of all income taxes on business. Let the people who have earned the money put it back to work in their own businesses.

Andrew B. Wilson is a resident fellow and senior writer at the Show-Me Institute, which promotes market solutions for Missouri public policy.

The post Is Texas Gov. Rick Perry Guilty of “Stealing” Missouri Jobs? appeared first on Show-Me Institute.

So what exactly is the reckless Kansas policy that the Post-Dispatch editors tell us must be avoided at all cost? First, Kansas lowered its income tax rate from 6.45 percent to 4.9 percent on individual income. For small businesses, namely those organized as S-Corporations, LLCs, Partnerships, and Sole Proprietorships, cases in which business income that is passed through to owners, Kansas eliminated the income tax altogether.

What does economics tell us about the likely effect of such a policy? For simplicity, assume that there are two main sources of income: labor and capital. The former is the payment for supplying work effort to a firm. The latter is the payment for resources that you provide to companies and is usually returned to you after the risk you face is realized. So income from loans and other assets, along with returns to entrepreneurial activity, are deemed capital income. Given that government has to raise revenues for public needs, which should be taxed more — capital or labor? In research that Christophe Chamley and Kenneth Judd conducted independently, the conclusion is unambiguous: tax rates on capital income are very detrimental. Chamley’s and Judd’s work is in line with the analysis that two Nobel Laureates put forward: Peter Diamond and James Mirrlees, who argued that taxes should be applied to the most inelastically supplied goods. Because capital is so mobile, its supply is very elastic and the optimal tax rate on capital income is zero.

Ironically, the editors at the Post-Dispatch accept that people on the Kansas border are very mobile, just not in response to taxes. They argue that people move from Missouri to Johnson County, Kan., because of school quality. The unstated premise is that these people still work in Missouri. Will a substantial tax nudge not lead to even more people seeking out those Johnson County schools? Or, more importantly, induce employers to plant businesses where their employees want to live?

The issue for policymakers is this: for a given level of state revenue, what set of tax policies will yield the revenues while doing the least economic damage? Kansas is trying an experiment. There is an economic rationale for this experiment. If you have to tax income, there is good reason to try to separate out taxes on labor income from taxes on capital income, because capital is highly mobile. In spite of the editorial board’s heated rhetoric, the economic fundamentals favor Kansas on this one.

Joseph Haslag is chief economist and Michael Podgursky is a co-founder and director of the Show-Me Institute, which promotes market solutions for Missouri public policy.

The post Taxes Do Harm Growth appeared first on Show-Me Institute.

Republican Governor Bobby Jindal said on Thursday he wants to eliminate all Louisiana personal and corporate income taxes to simplify the state’s tax code and make it more friendly to business.

The governor did not release details of his proposal, but his office released a statement confirming that the taxes are targets of a broader tax reform plan.

“Our goal is to eliminate all personal income tax and all corporate income tax in a revenue neutral manner,” Jindal said in the statement. . . .

Political analyst John Maginnis, who on Thursday reported in his email newsletter LaPolitics Weekly that Jindal will propose balancing the tax loss by raising the sales tax, now at 4 percent, said the strategy fits with the governor’s interest in keeping a high national profile.

My colleague Michael Rathbone and I have beaten the drum consistently about eliminating the corporate income tax in Missouri, which is a light lift compared to Jindal’s plan. Income taxes are among the most destructive in terms of economic growth, and the corporate income tax is arguably the worst. Instead of nickel ante reforms, Jindal is going full boat here and pursuing a policy that will make Louisiana a haven for workers and companies. Paired with Jindal’s school reforms, which include some of the same school vouchers James Shuls has discussed on our blog, Louisiana is emerging as a leader in the battle for forward-looking, pro-market reform.

Talk is cheap, even in Jindal’s case — we will see soon enough if something actually gets passed — but I think there is reason to believe we are seeing a sort of “American Growth Corridor” developing here that is extending from the Gulf of Mexico to the Great Lakes. But for Jindal’s huge announcement, this blog post probably would have been about Wisconsin Gov. Scott Walker’s own announcement yesterday that he will propose phased-in personal income tax cuts this year for his state. Last month, Nebraska Gov. Dave Heineman told business leaders that he wants to eliminate the state’s corporate income tax, just a year after modestly lowering the state’s personal income tax. Last year, Kansas eliminated its taxation on pass-through income. And Oklahoma is still looking to cut its tax on personal income this year.

So, Missouri policymakers . . . what are we going to do here? Bueller? Bueller?

The post Lowering the Boom: Louisiana Looks to End Its Corporate and Personal Income Taxes appeared first on Show-Me Institute.

Don’t believe it? If so, that’s only because our governor and most of our lawmakers and business leaders have yet to wake up to what has happened.

For many years now, the economic development agencies in both states have fought to a draw, poaching business from each other through targeted tax credits and other subsidies to induce individual businesses to move from one side of the border to the other. Local governments have compounded the problem by offering tax incentives of their own to cater to a tiny contingent of well-connected companies, choking funds from libraries, schools, and other public services dependent on local tax revenues.

This high-stakes game was a win-some-lose-some proposition for both states, played out in a particularly frivolous way in the Kansas City region when corporations moved a handful of miles one way or the other to gain a temporary tax advantage – a situation not unlike the short-sighted Tax Increment Financing (TIF) wars seen in Saint Louis County. Then Kansas got serious about economic growth.

In May, Kansas Gov. Sam Brownback signed the biggest tax cut in the state’s history. The new law cuts the top personal income tax by more than a point to 4.9 percent, well below Missouri’s top rate of 6 percent. That would be cause enough for concern in Missouri if that was all Kansas had done. But more boldly, Kansas cut its tax on the non-wage pass-through income of businesses such as limited liability corporations (LLCs) and subchapter-S corporations (S-Corps), reducing taxes on the income generated from approximately 191,000 Kansas businesses to a rate of zero. Millions of small businesses nationwide are organized as LLCs and S-Corps that enjoy many of the legal benefits of a traditional corporation while being taxed like partnerships. A tax rate of zero on this income is awfully hard to beat, freeing capital for Kansas entrepreneurs to reinvest in their businesses and spend in the market.

The excitement brewing in Kansas does not have to stop there. Missouri may not have the chance to be the “first” to embark on the sort of economic development revolution taking place in the halls of Topeka, but it does not have to be the last. Significant and similar tax reductions and reforms are achievable in Missouri, if there is a political will for it in Jefferson City.

But what happens if Missouri does not act? The state will almost certainly be left behind — not only by Kansas, but by other smart, pro-growth leadership across Missouri’s western border. This year, Nebraska cut its personal income taxes and has primed the pump for future reductions. Oklahoma is seriously considering phasing out its income tax entirely, including deep near-term rate cuts.

If Missouri lawmakers do not arm the state with sound, broad-based, free-market tax reforms of their own, the state risks economic defeat at the hands of her cross-border rivals in one of the most important games imaginable: the one that will determine our future prosperity. We can turn this game around, but time is running out.

Brenda Talent is executive director and Patrick Ishmael is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.

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The new law reduces the state’s top tax on wage income from 6.45 percent to 4.9 percent. Much more dramatically, however, it also abolishes the state income tax for many entrepreneurs and small business owners.

Under the new law, partnerships, S-corporations, and sole proprietorships are now exempt from paying any state income tax in Kansas. For example, if the owner of an S-corporation has $10 million in sales and $500,000 in “pass-through income” — meaning income after wages and other expenses — he would pay zero taxes to the state of Kansas on his $500,000 income.

Officials in Kansas make no secret of the fact that they want to promote their state as a Midwestern tax haven — appealing to entrepreneurs and small businesses in neighboring states, including Missouri, which has a top individual income tax rate of 6 percent, or $30,000 on $500,000 in income.

If small business owners in Missouri, Oklahoma, or other states want the same deal that Kansas is now offering to more than 190,000 small businesses, they just need to relocate to the Sunflower state.

How big a threat does this pose to the future growth and prosperity of our state? As economists, we can offer a few back-of-the-envelope calculations.

Missouri entrepreneurs in the 11 counties bordering Kansas would presumably be among the first to move. The population within these counties is 1.48 million people, or just more than 24 percent of the state’s total. For 2010, the total aggregate income of people filing individual income tax forms in Missouri for partnerships, S-corporations, limited liability partnerships, and sole proprietorships is $13.2 billion. Based on the population distribution, we would therefore expect that people with pass-through income in the border counties would account for roughly 24 percent of the $13.2 billion, or $3.17 billion.

Let us suppose that 10 percent of small businesses and entrepreneurs in those border counties deemed it worthwhile to move. That would translate into a $317 million reduction in goods and services and a roughly 1 percent reduction in income in the border counties. Based on 2011 income per worker, Missouri would see about 4,500 jobs go across the border.

Of course, people in other parts of Missouri might also elect to take advantage of the welcome mat that Kansas has put out for entrepreneurs and small business owners and that would further erode the base of our already weak and under-performing state economy. Entrepreneurs who might otherwise have launched their new business in Missouri may choose to launch it in Kansas instead.

Oklahoma Gov. Mary Fallin is advocating a reduction in her state’s top income tax rate to 4.5 percent from the current 5.25 percent, and she has cited the new Kansas law as cause for urgency. “Oklahoma needs to compete with our neighbors,” Fallin said. “To do that we need to lower our income tax.”

In a recent press conference, Missouri Gov. Jay Nixon sounded strangely complacent, saying “we haven’t spent a great deal of time talking about what they (Kansas) did.” With all due respect, we suggest that this is something worth discussing.

Our lawmakers need to start thinking seriously about creating a more favorable tax regime for economic growth and job formation in Missouri.

Joseph Haslag is chief economist and Michael Podgursky is a co-founder and director of the Show-Me Institute, which promotes market solutions for Missouri public policy.

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