The new law will gradually cut Missouri’s top individual income tax rate starting in 2017 and make the state just the third in the nation to offer a special business-income deduction on personal tax returns. But the incremental tax cuts will occur only if Missouri’s revenues keep growing.
The tax cuts could benefit about 2.5 million individuals and families, with the wealthiest standing to gain the most, and would provide an extra boost to hundreds of thousands of people involved in business partnerships, limited liability corporations or their own ventures.
Republicans made an income tax cut their priority for 2014 after failing last year to override Nixon’s veto of a more complex and expansive tax cut. The GOP holds large majorities in both the House and Senate, but needed a little Democratic help in the House to accomplish the two-thirds vote needed to override this year’s veto.
Like their colleagues in other states, Missouri Republicans touted that tax cut as means of remaining competitive with their neighbors and boosting the economy as revenues rebound from the Great Recession. But the tax-cutting trend has not been limited to Republican states. About a dozen states passed income tax cuts last year and at least half that many already have voted to cut income taxes this year, including Democratic-led New York and Republican-led Oklahoma.
While vetoing the Missouri measure, Nixon had raised concerns that it could jeopardize funding for essential state services while providing a much larger benefit to the rich than the poor. He described it as “an unfair, unaffordable and dangerous scheme that would defund our schools, weaken our economy, and destabilize the strong foundation of fiscal discipline” in Missouri.
Economists at the University of Missouri-Columbia have estimated that the tax cut will eventually reduce state revenues by $620 million annually. But Nixon asserted it could punch a $4.8 billion annual hole in the state budget. He contends the bill’s wording could be interpreted to eliminate taxes on all income over $9,000, though Republican legislative leaders have called that “laughable” and “absurd.”
The new law is designed to gradually reduce Missouri’s top individual income tax rate — currently charged on all income over $9,000 — from 6 percent to 5.5 percent. It also phases in a new 25 percent deduction for business income reported on personal tax returns. Each incremental cut would occur only if state revenues grow by at least $150 million over their high mark from the previous three years.
The legislation also would increase a tax deduction for low-income residents and make annual adjustments to Missouri’s tax brackets based on inflation, which could effectively result in perpetual tax cuts.
Republican supporters tout the revenue trigger as an important safeguard that will ensure Missouri’s budget keeps growing despite the tax cuts. But had the law been in place, a revenue increase in the 2008 fiscal year would have caused a tax cut to occur in 2009 as state revenues plummeted as a result of the recession.
Missouri’s tax cut is a less aggressive version of measures recently enacted in Kansas, which lowered its top tax rate and fully exempted certain categories of businesses from taxes.
Last week, Moody’s Investors Service downgraded Kansas’ credit rating, noting its sluggish economic recovery compared with other states. Kansas revenues declined in April. Among other things, Moody’s said the income tax cuts were putting pressure on the budget and creating risk for the state’s financial future.