Missouri governor calls tax cut plan a defense against ‘pet project’ spending by lawmakers

University of Missouri economist suggests ‘deliberate investment’ could pay bigger dividends than income tax cuts

By: - August 26, 2022 5:55 am

Gov. Mike Parson, left, speaks with Matt McCormick, president of the Columbia Chamber of Commerce, at an event Thursday to promote his plan for income tax cuts and agriculture tax incentive programs (Rudi Keller/Missouri Indpendent).

COLUMBIA — To pass a $700 million tax cut plan in a short special session, an important consideration is to “keep it simple,” Missouri Gov. Mike Parson said Thursday morning.

That’s why Parson’s proposal accelerates income tax cuts already set to be phased in over several years rather than reduce other tax sources, he told reporters after touting his plan to a gathering of about 75 business, farm and local political leaders.

Earlier this week, Parson set Sept. 6 as the starting date for a special session to consider a one-half percent reduction in the top tax rate and a six-year sunset on a package of tax credit programs aimed at agriculture. He said Monday he hopes lawmakers can wrap up work by Sept. 14.

“It’s about as simple a bill as you could make it in Jefferson City that everybody understands,” Parson said. “Everybody knows exactly what we’re doing.”

The state general revenue fund is enjoying its largest-ever surplus, with $4.2 billion on hand at the end of July. Growth so far in the current fiscal year is running at 23.8%, compared to an estimate of 2.1% made in January.

The three largest sources of general revenue in the state budget are income taxes, which brought in $10 billion in the fiscal year that ended June 30; sales tax, which brought in $2.7 billion; and corporate taxes, which totaled $900 million.

If lawmakers wanted to provide immediate relief from record inflation, a cut in the state’s sales tax might be a better strategy, said Joe Haslag, an economist at the University of Missouri-Columbia. 

A sales tax cut equal to the  $700 million income tax cut would see the 3% charged for general revenue reduced to 2.25%. 

Sales taxes “compound the effect of inflation,” Haslag said. “The math is straightforward.”

But if the goal is to grow the economy, he said, an income tax reduction has a bigger impact.

“If part of your objective is to smooth out the consequences of inflation, then by all means (sales tax) would be the tool you would use,” Haslag said. “What Gov. Parson is saying is he is trying to establish Missouri as a low-tax state, to provide incentives to come to Missouri, leading to faster growth.”

Parson’s plan

In 2014, over the objections of then-Gov. Jay Nixon, lawmakers passed an income tax cut intended to step the top rate down from 6% to 5.5%, with each step occurring when annual revenue growth exceeded $150 million.

Two other tax cut measures, in 2018 and 2021, made additional reductions in the top rate and increased the number of growth-triggered steps to seven. The rate this year is 5.3%, with five more reductions to come before the top rate settles at 4.8%.

Parson wants to replace those incremental cuts and set the rate at 4.8% now. He said Thursday he’s confident it will not hurt any program relying on state funds.

“When everybody says, ‘oh, you’re using federal money to backfill that’…propaganda,” Parson said. “When they’re saying we’re going to take it away from the schools and education centers, propaganda. When they say we’re not going to help health care, it’s all a political spin.”

Parson began talking about a permanent tax cut when he vetoed a plan for tax rebates that would be issued this fall. Lawmakers set aside $500 million to make payments of up to $500 for single taxpayers and $1,000 for married couples, with the rebates targeted to incomes of $150,000 and below.

Parson, a Republican, has been lobbying both Democratic and Republican lawmakers seeking support for his plan. Senate Democrats told him they liked the rebate plan passed during the session because it was a one-time use of state funds and offered immediate help for families hurt by inflation, said Senate Democratic Leader John Rizzo of Independence.

This year’s budget uses almost $2.7 billion from the American Rescue Plan Act, or ARPA. State revenues have also been padded by increased federal contributions for Medicaid tied to COVID-19 and expanded Medicaid eligibility.

Some of those funds are being spent on new projects, like expanding broadband access to every household in the state and eliminating lead pipes from water systems.

The state can also expect billions in increased federal support for infrastructure projects like highways, mass transit and the electric grid under spending bills passed at the urging of President Joe Biden.

That allowed increases in general revenue spending in other areas. Public schools will see support for transportation costs triple in this year’s budget and and higher education is gaining funds from more spending on scholarships and general state support.

A one-time rebate is preferable to a permanent cut, Rizzo said, because it provides more certainty in the future.

“We worry about making ends meet after the ARPA funds and COVID stimulus that the federal government has given out is gone,” Rizzo said. “We worry what this looks like.”

Lobbyist Jim Moody, who was state budget director under former Gov. John Ashcroft, said political leaders have forgotten that tax cuts at a time of surplus can make it difficult to pay the bills when a recession hits.

In the late 1990s, state revenues triggered refunds under the Missouri Constitution’s Hancock Amendment. 

To get under the cap, lawmakers exempted food purchases from the general revenue portion of the sales tax. A few years later, when revenues dwindled during a recession, then-Gov. Bob Holden proposed a $700 million tax increase package to cover a revenue shortfall.

The lesson is to be cautious, Moody said. 

“You have a lot of money there and I think the issue of balance is one of determining what steps you take that just use fund balance for a while, which is OK, versus what actions you take that cause the loss of future revenue,” Moody said.

Speaking to reporters Thursday, Parson said he believes his proposal strikes that balance.

“We’re still gonna have money left over on the bottom line,” Parson said. “What I don’t want to do is leave a bunch of money on the table and everybody wants to do a pet project and spend money that they won’t be accountable for someday.”

Alternatives

The choices facing lawmakers in the upcoming special session are to enact Parson’s plan, cut other taxes or do nothing.

Accelerating the remaining incremental tax cuts will cost the state more than $2 billion in revenue it would otherwise receive, about half of the current surplus. The question, Haslag said, is whether that money could help the economy more with targeted use rather than individuals spending it.

“There is room for deliberate investment,” Haslag said. “It has to be done very, very carefully.”

High-tax states with strong commitments to higher education have strong growth rates, Haslag said. A targeted investment in higher education, he said, could be a nuclear engineering program on the university’s Columbia campus, which is home to the nation’s most powerful university-based nuclear reactor.

Along with meeting personally with Democrats, Parson has enlisted GOP mega donor Rex Sinquefield, who has pushed in the past for higher sales taxes to replace the income tax, to meet with Republicans. Sinquefield brought conservative economist Arthur Laffer, credited as the architect of the controversial tax cut package in Kansas that was ultimately repealed after years of budget shortfalls.

Laffer also created a graphic depiction of the impact of taxation called the Laffer Curve, intended to show that taxes above a certain level are a drag on the economy and produce less revenue than lower rates.

The Laffer Curve also indicates that taxes that are too low means the government doesn’t have the money to support the economy to the best of its ability. Missouri is at that point on the curve, Haslag said.

“It is not the size of Missouri government that is the problem,” Haslag said. “The problem is how they spend the resources they are given.”

The increases provided to education and infrastructure programs in this year’s budget are a good start, Rizzo said, but the state should be doing much more. 

“We still have the lowest starting salaries for teachers in the U.S.,” Rizzo said. “We are still going to be in the top 40s of teacher salaries, even, to the governor’s credit, after we passed an increase for teachers.”

If most of the money from tax cuts goes to middle-class and poor families, then it will provide immediate relief, Rizzo said. But if the biggest share goes to high-income earners, he said it is better to keep it in the state treasury.

“This is a delicate balance to providing tax relief to working families in Missouri as well as keeping our end of the bargain on education,” he said.

Along with cutting the highest rate, Parson’s plan increases the minimum income thresholds before taxation begins. At the event in Columbia, Parson said every person with taxable income will see benefits from his plan. Individuals over 65 with incomes below $20,000 will no longer pay any state taxes, he said, nor will married couples with incomes below $32,000.

“We’re trying to take care of all elements of people that are in the workforce,” Parson said. “If you’re drawing a check, you’re gonna benefit from whatever level you might be.”

When he announced his plan, Parson said his office had been studying how to cut taxes for the past year. Asked if he had considered a sales tax cut as an immediate way to relieve inflation, he said his plan was more straightforward.

“That really needs to go through the legislative body and have committee hearings and things,” he said of a sales tax cut.

Missouri has a complex sales tax system, with layered taxes that push the 4.225% levied by the state to 11% or more in hundreds of locations. The base of the system is the 3% general revenue tax. The other state sales taxes are 1% for public schools, 0.125% for the Department of Conservation and 0.1% for state parks and soil conservation.

Cities, counties and special purpose districts all have authority to add to the state rate with voter approval.

The bill in 1997 that took the state general revenue tax off of food purchases did not remove the other state taxes and local taxes that continued to be charged. The 1% tax for schools raised about $225 million more in fiscal 2022 than each 1% of the general revenue tax.

“My own view is that when we did that it was a huge mistake,” Moody said.

Other exemptions further narrow the base, and the confusing application makes the state sales tax a poor choice for a cut, Moody said. Local governments, for example, might see a state cut as an invitation to ask voters for higher rates for their purposes, he said.

“There are too many people with their hands in the sales tax pockets,” Moody said.

The other tax that could be cut by $700 million, the corporate tax, would have little benefit for individuals, Moody said.

That leaves an income tax cut or a sales tax cut as the alternatives if lawmakers want to cut revenues, he said.

“The real world is,” Moody said, “there are only two choices here.”

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Rudi Keller
Rudi Keller

Rudi Keller covers the state budget, energy and the legislature. He’s spent 22 of his 30 years in journalism covering Missouri government and politics, most recently as the news editor of the Columbia Daily Tribune. Keller has won awards for spot news and investigative reporting.

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