Missouri is the first state in the nation to tax income but not capital gains after the state legislature passed a law eliminating the state’s capital gains tax during the 2025 session.
Capital gains are profits made from selling assets like stocks and real estate. Eliminating the tax on those profits will overwhelmingly benefit the state’s millionaires, according to a new report from the Institute on Taxation and Economic Policy (ITEP), a left-leaning economic think tank.
According to ITEP’s analysis, more than 66% of the tax savings under the new law will go to the top 1%, or those with incomes averaging $1.9 million or more per year. The average millionaire — defined as a family with more than $1 million in annual income — will save $43,000 annually, more than 529 times the $80 savings for the average non-millionaire.
The report names Missouri as one of the five states with the largest tax cuts for millionaires this year. Also in the top five is Kansas, which earlier this year approved reductions to the state’s individual and corporate income taxes.
In the Sunflower State, the report estimates millionaires will save 83.6 times more than their non-millionaire neighbors, saving an average of $51,260 while less wealthy Kansans will keep about $610.
These cuts came as the Trump administration and its allies in Congress passed changes to the federal tax code, which the nonpartisan Congressional Budget Office estimated would primarily benefit the country’s wealthiest households.
The cuts also come amid a yearslong competition among states to cut taxes in the hopes of encouraging growth and investment.
In a June news release, Missouri Gov. Mike Kehoe called the capital gains tax cut “pro-growth legislation” and said he is “proud to return Missourians’ hard-earned dollars back to them.”
Carl Davis, research director at ITEP, said that while state lawmakers have been “very focused on tax cutting” in recent years, that may not last much longer.
“I expect that trend is going to peter out in the months and years ahead, because there’s a lot of reasons to think that states are about to face a lot more challenging budget situations than they have these last several years,” he said.
A competitive landscape
As states across the country cut taxes, Missouri is “in a constant race to keep the state economically competitive,” according to Elias Tsapelas, director of state budget and fiscal policy at the Show-Me Institute, a conservative economic think tank.
“We do see that corporations tend to move around a lot based on where it makes the most sense for them tax-wise or workforce-wise,” Tsapelas said. “So I think all of this is aimed at getting more people and businesses to come to Missouri, or keeping them here.”
Janelle Fritts, a policy analyst specializing in state tax policy for the center-right Tax Foundation, said Missouri has scored well on her organization’s annual state tax competitiveness index.
“Missouri, overall, was doing quite well (last year). It was No. 13 overall,” Fritts said. “It saw pretty good scores in corporate tax, unemployment insurance taxes … but (on) the individual income tax, it was 20th. This new lack of capital gains taxation will probably help them in that category.”
The only other states that have eliminated their capital gains taxes have done so by eliminating all of their income taxes. Those states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming. Washington, which does not have an income tax, opted to still tax capital gains.
In contrast, Missouri is the first state to keep its personal and corporate income taxes but eliminate taxes on capital gains for both groups.
“Missouri, by taking this step, is taking a step forward into being more competitive, because they’re not taxing this thing that everybody else does,” Fritts said.
That can encourage people already in Missouri to stay in the state, Tsapelas said.
The capital gains tax cut will also apply to corporations once the state income tax rate drops to 4.5%, which will happen after certain triggers are hit. The state expects to hit those triggers by 2029.
Cutting corporations’ capital gains taxes will help the state retain and attract businesses, according to Tsapelas.
But research has shown there are more significant drivers of company relocation, according to Traci Gleason, a spokesperson for the center-left Missouri Budget Project.
The biggest factors are “consistency, access to a skilled, educated workforce, quality of life in the community and the infrastructure available,” she said. “All of that stuff takes tax revenue to build and provide.”
Who benefits?
Davis said that in the 18 years he’s worked in tax and economic analysis, he can’t recall a state seriously considering a capital gains tax cut without also cutting other income taxes.
“Traditionally, there’s been some level of agreement among folks on the left and the right that it makes sense to levy taxes in a broad-based way where you’re not picking winners and losers,” he said. “To just jettison it entirely from the tax code is not in line with what most experts would consider to be sound tax policy.”
“We’re now in a situation in Missouri where someone who’s working very hard at a job and earning a modest wage has to pay income tax, whereas somebody who has a lot of passive income — say they’re making a lot of profit off cryptocurrency sales, for example — is going to be exempt from income tax,” he added. “And I don’t think that’s a situation that’s going to sit well with a lot of people.”
Asked about any disproportionate effect on wealthier Missourians, Tsapelas said it’s hard to gauge because of the complexities of individual families’ finances and the tax system.
“I would guess, once it’s fully implemented, you’re going to see the biggest impact for corporations and then probably higher income seniors,” he said. “That would be my best guess.”
Fritts said “it’s possible” the cut will offer greater benefits to higher-income families, but she said all Missourians will still benefit to some degree.
“It makes it a little more advantageous for (less wealthy families) to save, whereas maybe it wouldn’t have been as advantageous before, and that way, they can get some investments,” Fritts said.
“By having a lot of people that are saving, businesses are getting a lot more inflow of money, so they can grow more. It helps grow Missouri’s economy,” she added. “If businesses are growing, they’re making more jobs. There are more opportunities, even for lower-income folks.”
Davis said he doubts the corporate capital gains tax cut will “have any benefit whatsoever to Missouri” because “the corporate income tax is overwhelmingly paid by a relatively small number of extremely large companies.”
“A lot of the gains being exempted here are going to be investments that Missourians are making in multinational companies, in businesses all around the country and all around the world,” he said. “Exempting the profit that a very wealthy Missourian makes from selling stocks in Google or Amazon is not going to grow Missouri’s economy. If that’s the goal, this is an extremely inefficient way to get there.”
A targeted approach
Tsapelas said that in their research, he and others at the Show-Me Institute have found that cutting the broader income tax rate would be “beneficial for the state’s economic prospects.”
Asked about the legislature’s decision to cut the capital gains tax but not the broader income tax, Tsapelas said he is “certainly more supportive of cutting the income tax rate for everyone.”
“Missouri currently has these revenue triggers that will lower the rate eventually. … But while we have some of these benchmarks we haven’t hit yet, the legislature has been looking at carving out other areas,” he said. “A couple years ago, they carved out Social Security income. This time, you have capital gains.”
“Broadly, I would rather cut the rate itself and get the rate for everyone lower, faster,” he added. “But I think they decided to go the route of something more targeted, and I think there will still be some benefit from it.”
A looming budget shortfall and an unknown cost
Missouri is facing a budget shortfall in the near future, according to the state Office of Administration.
The office “estimates a nearly $1 billion shortfall in general revenue” starting in fiscal year 2027 because of overspending, Kehoe wrote in a news release. “While Missouri currently has a general revenue fund balance to absorb some of this imbalance in the short term, the current trajectory of state-level spending grows this imbalance.”
In the release, Kehoe wrote that while he was proud to sign the new tax cuts into law, “the reduction in state revenues must be accounted for in current and future budget decisions.”
Kehoe used the budget shortfall as justification for his decision to veto or restrict more than $2 billion of $52.8 billion in spending that lawmakers had approved during the session, including nearly $35 million in funding for programs serving the Kansas City metro area.
Understanding the relationship between the budget shortfall and the new tax cut is complicated by the fact that no one — not even the state government — can agree about how much revenue the state will lose as a result of the cut.
The Missouri Department of Revenue initially estimated that the state would lose about $111 million per year. But the Institute on Taxation and Economic Policy estimated the cost to be more than $600 million annually.
While the department initially rebutted ITEP’s numbers, the bill’s fiscal note was later changed to reflect that the cost could be as high as $625 million in fiscal year 2026.
Meanwhile, the governor’s estimate fell in the middle. He wrote in a press release that he expects the cut to cost the state $400 million per year.
Tsapelas acknowledged that “there are always revenue trade-offs with these things,” but said the state needs to take a hard look at its budget as well.
“I’m not here saying that all of these are necessarily going to pay for themselves,” he said. “I think there will be increased economic growth, which will help pay for them, but I think we also have to recognize that Missouri has a budget. I do think there are ways the budget could be trimmed to work better.”
“Missouri’s spending has nearly doubled since 2019. The budget is enormously larger. While a lot of that you can attribute to the federal government, state revenue collections are also much higher,” he added. “I think there’s a broader discussion Missouri needs to have about what level of government services they want and what level of taxation that requires.”
The budget shortfall is the result of the state outspending revenue, but also the product of declining federal funds, Gleason said.
“Because of federal COVID funds, we were able to use that money and save up some general revenue funding. The past few years, we’ve been drawing on that saved revenue to help bridge the budget,” Gleason said. “Because of that extra padding, we were able to continue to fund services at a higher level than we’re going to face now.”
That presents a challenge for those who rely on state services, Gleason said, because Missouri “already underfunds a lot of its services compared to how it used to provide services.”
“When you think about per-capita investment in services like community colleges, public education, child care subsidies, and compare it to what other states do … it’s been a bit of a frog in the boiling pot, where it happens so slowly over time, it has become the status quo to folks,” she said.
It also presents a challenge as lawmakers in Washington, D.C., shift financial responsibility for programs like Medicaid and SNAP food assistance to states, Gleason said.
Missouri “could potentially be looking at $1-2 billion in additional costs,” she said. “Do they cut services? Do they look at other tax increases? Because they do have to pass a balanced budget.”
Fritts said cutting capital gains and other income taxes could necessitate finding new revenue streams.
“The other states that don’t have capital gains taxes are, of course, the ones that don’t have any income tax at all. Those states tend to make up for the lost tax revenue in other ways,” she said.
“Florida, for example, doesn’t have an income tax, but it has a ton of tourism. … Some other states that don’t have income taxes, like Wyoming, get a ton of money through severance taxes because they have a lot of oil,” she added. “Not every state can do that same thing.”
This story was originally published by The Beacon, a fellow member of the KC Media Collective.
