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.

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

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

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

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

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

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

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

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

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Jefferson City is awash in taxpayer cash. Missouri’s state government is slated to receive $2.7 billion in federal stimulus funds from the American Rescue Plan Act along with $9 billion from the “bipartisan” infrastructure bill. In addition, the state expects to bring in nearly $2 billion more in net revenues compared to just before the pandemic. What is disconcerting is how quickly some lawmakers—including self-proclaimed fiscal conservatives—have shed sound economic principles in their rush to find ways to spend the money, forgetting the wise words of Nobel Prize winning economist Milton Friedman that “there is no such thing as a free lunch.”

The simple, alluring, and false logic is as follows: either Jefferson City spends the money or the funds get sent back to the federal government to misspend on other boondoggles. But Missouri does not have to choose whether Jefferson City or the federal government gets the privilege of misspending taxpayer money. There is another way—one in which state lawmakers apply a strict cost–benefit test to all proposed spending and in which Missouri taxpayers are the beneficiaries of direct fiscal relief from any unused funds that fail to pass such a test.

To begin, it is crucial that lawmakers be aware that misspent money today—even if it has the false appearance of being “free”—can saddle Missouri with fiscal obligations, a weaker economy, or both, in the future. Because the funds are a one-time injection rather than a reliable stream of future revenue, Jefferson City must avoid engaging in spending that creates long-term future commitments (for example, in the form of unfunded maintenance). Lawmakers should also be wary of any government investment that crowds out private-sector investment. Infrastructure spending ought to enhance the private sector, not compete with it.

The other obstacle to sound cost–benefit analysis is the mistaken belief that the cost of the stimulus and infrastructure funds is zero because Washington, D.C., will both supply the money and reclaim any unspent funds. After all, the message to lawmakers has been that states cannot use the money to offset tax cuts. But this is an oversimplification of the options available to state officials. For starters, as long as state revenues stay above their inflation-adjusted 2019 level, the American Rescue Plan Act provides a safe harbor that deems states to be in compliance with the restriction against using stimulus funds for state tax cuts. That inflation-adjusted revenue threshold is likely to be around $10.8 billion in 2023, which is $600 million less than the $11.4 billion in revenues the state is projected to take in. Thus, state lawmakers immediately start out with a cushion of $600 million that they can provide in tax relief without risking stimulus funds.

Second, the American Rescue Plan Act only prohibits state governments—not local governments—from using stimulus funds to offset tax cuts. Moreover, it explicitly allows the state to transfer some of its funds to localities. Nothing in principle stops Jefferson City from distributing money to localities on the condition that they use the money to enact temporary local sales or property tax cuts. When using such transferred funds, localities must abide by any restrictions that apply to the state, but the American Rescue Plan Act does not impose any restrictions on local tax cuts. To create an even more secure legal hedge, Jefferson City could come to an agreement with localities that they use much of their own $1.2 billion in earmarked local stimulus funds for tax cuts, and the state could transfer some of its funds to localities to put toward sound public investments. This way the funds allocated originally to Jefferson City would be used on public investments, while localities would focus on tax relief.

Lastly, the American Rescue Plan Act allows state and local governments to apply stimulus funds toward mitigating the negative economic consequences of the pandemic, chief among which is the decades-high inflation that Americans are suffering through. Seven percent inflation in 2021 caused real wages to drop 2.3 percent, which amounts to an almost $900 “inflation tax” on the average worker. Jefferson City could simply opt to send direct fiscal relief to Missouri workers to offset this tax.

With coffers flush with cash, it is true that state lawmakers have a rare opportunity to make pivotal public investments to improve private-sector productivity. However, they would be wrong to view the money as “free” or the cost of spending the funds as zero. Instead, they should apply the same cost–benefit test that they would use for spending financed from state tax dollars with the knowledge that any unspent money need not go back to Washington, DC—it can end up directly in the pockets of struggling Missouri families.

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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.

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This isn’t the only time the Missouri Budget Project has come up with revenue estimates out of whole cloth. In one of its write-ups about a Senate tax cut bill last year, the Missouri Budget Project stated that the bill would “slash Missouri’s general revenue budget by nearly $1 billion when fully implemented.” Page two of the report shows the year-by-year breakdown of estimated revenue losses, but you won’t see anything explaining how MBP came up with these numbers. There isn’t even an endnote.

Compare that to some of the analysis we do at the Show-Me Institute. When my colleague Policy Analyst Patrick Ishmael and I wrote “Passing Through Missouri: Left Behind On Taxes,” we included an entire section of the Appendix detailing our methodology and on what we based our estimates. The Missouri Budget Project’s tax analyses don’t contain anything like that. Yet when MBP officials are quoted in news articles, their numbers are accepted, seemingly without question.

The Missouri Budget Project is free to come up with any numbers it wants, but why aren’t those numbers backed up with explanations? As Wendy’s (and Walter Mondale) used to ask, “Where’s the beef?”

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• Starting in 2016, Missouri would have just three tax brackets: A 4 percent tax rate on annual incomes of $30,000 or less; 6 percent on incomes between $30,000 and $300,000; and 8 percent on incomes higher than $300,000.
• There would be an additional tax deduction for those making less than $15,000.
• The limit for the total amount of federal taxes a taxpayer can deduct from his/her income would be lowered, from $5,000 to $2,000 for singles and from $10,000 to $4,000 for combined returns.

I am glad there is growing recognition that Missouri is not a low-tax state (at least for most people). I like the fact that this proposed plan shrinks the number of tax brackets from 10 to three. I also like that many Missourians would receive some tax relief. However, raising taxes on those making more than $300,000 a year is not a good idea.

Now, it’s easy for some people who make significantly less than $300,000 to shrug their shoulders about taxes increasing on Missourians with higher incomes. “I’m getting more money, so what if some rich guy has to pay a little more. He can afford it.” The reality is that many of these “rich” people are business owners who report their business income at the individual level. If the state starts taking even more money from these business owners, that’s less money for payroll, which means less money for new workers and less money for raises. Is that going to stimulate economic activity in Missouri? I don’t think so.

If I lived in Kansas, I would love this bill. Unlike Missouri, Kansas business owners face a tax rate of zero. If this bill actually became law, Kansas businesses would have a significant tax advantage over those in Missouri, which would make Kansas an even more alluring destination for Missouri businesses. That isn’t an attractive prospect for Missouri’s economy.

Also, I don’t like this bill limiting the amount of federal taxes someone can deduct from his/her state taxes. The money I pay out in federal taxes isn’t income. I can’t go out and buy a new phone or television with it. I can’t save or invest it, either. So why would the state treat it as if it is income? Limiting this deduction without reductions elsewhere is a form of double taxation.

The sponsors of this bill are to be commended for wanting to bring tax relief to a significant number of Missourians. However, this positive does not outweigh the negatives of increased income taxes on other residents (through higher rates and limited deductions), including many business owners.

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The next question is, why have the number of subsections in Chapter 143 of Title X increased? Several possible answers apply. For one thing, no law is ever written perfectly the first time. So, new subsections refine things, such as loopholes that were not evident when the law was initially written and to redefine what income is subject to taxation. Additionally, the state assembly sees opportunities to use tax laws that seek to stimulate economic development by changing the amount of income subject to the state income tax. By implementing such changes, the carrot-and-stick approach aims to modify people’s behavior so that the Missouri economy will grow faster.

Third, if we started from scratch, would we implement the same set of subsections? The calls for tax reform are based on the notion that tax code becomes unnecessarily complicated over time. The view is that the number of laws that adjust taxable income changes over time complicate things by altering the set of deductions, exclusions, and credits that apply to taxpayers.4 Each filer must keep up in order to comply. Each new subsection adds a layer of new questions that taxpayers confront when filing their taxes. Do I qualify for the new tax credit? Does the new deduction apply to me? On the other hand, the filer risks either not complying or paying too much in taxes if he ignores new tax laws.

We have moved systematically through three questions. At the end, there is a case to be made for tax reform, if nothing else, to reduce the complexity and save people time. Tax reform, however, is not limited to dealing with the complexity issue. Indeed, it is also a good time to ask, what kind of taxes do the least harm to Missourians?

Read the essay: .

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Unfortunately, the jobs that are promised do not always happen, and part of the reason for this is that governments, by and large, are not very good at picking successful “investments” for their constituents.

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I previously blogged about my friend Chris Seyer and the new obstacles his business faces to compete with other firms in Kansas. Those other firms now can add a little extra to their margins because they do not have to pay taxes on their pass-through income. His is not an isolated case and that is why there is a growing chorus in Jefferson City to see some sort of tax cut implemented.

There are several tax cuts being discussed. One of them would create a tax deduction for business income and would gradually reduce the corporate income tax rate over a five-year period. Another caps and eliminates certain tax credits and uses the extra revenue to gradually eliminate the corporate income tax.

The idea of cutting the corporate income tax rate is something that appeals to me, so much so that I co-wrote an essay illustrating the benefits to the state of completely eliminating the tax. Whether the tax cuts are phased in or occur immediately, I am glad that the Missouri Legislature is seriously considering tax cuts. Hopefully, the tax cuts would take effect sooner rather than later, but if takes until 2018 to get rid of the corporate income tax, then some things are just worth waiting for.

However, legislatures consider a lot of things; actually enacting them is entirely different. Regarding tax reform, as the King would say, we need a little less conversation and little more action.

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