Gov. Mike Kehoe wants voters to decide whether to phase out Missouri's income tax over a five-year period, which would divert nearly $9 billion that goes to state revenue back to residents. His proposal would also authorize an expansion of the state sales tax on services, such as monthly subscriptions or digital services like Audible.
"At first blush, that sounds great," said Washington University professor Sarah Narkiewicz. "Nobody wants to pay income tax."
If the state's income tax is eliminated, however, Narkiewicz and other tax policy experts anticipate that Missouri's already regressive tax system would become more so — that broadening the sales tax would "put a squeeze on" low- to middle-income residents.
"We've seen this play out elsewhere in the country," said Eli Byerly-Duke, who monitors trends in state tax policy for the Institute on Taxation and Economic Policy.
About 60% of Missourians would experience a net tax increase under Kehoe's plan, according to Byerly-Duke's estimates. Households with a yearly income of $65,000 would see a $500 tax increase each year, while households in the top 1% would see an average tax cut of nearly $40,000.
Income tax makes up 60% to 70% of Missouri's general revenue fund, said Narkiewicz. Eliminating that tax, she added, could lead to a deficit that would affect services including education, roads and health care — especially in the wake of a new state law that fully exempts capital gains from tax.
"I think people need to really evaluate this with respect to their own situation, but also with respect to how it affects the state as a whole," said Narkiewicz. "If you financially benefit, but the state becomes less desirable because all the services are cut, it could be something that ultimately impacts everyone."
Kehoe said that there are no plans to increase property taxes and that health care and agriculture would be exempt from any expansion of the state sales tax.
Compared to other states, Missouri has a relatively low state sales tax rate, which is currently 4.225%. But many of the state's districts have local sales tax rates of 11% or higher.
"If we have to increase the base state tax rate, that could go up significantly," said Narkiewicz. "Not only would the rate you're paying on what we already pay tax on go up, but you're paying tax on all these new additional items and services."
Narkiewicz added that many consumers may not realize that they aren't paying sales tax on the majority, or at least a significant portion, of their purchases, including services like haircuts, home repairs and legal representation. She said she doubts that an expansion of Missouri's sales tax would be limited to digital services and subscriptions.
"When sales tax was created in the mid-1930s, everything that was taxed [and] everything that was sold was what I would call tangible personal goods," she said. "As the economy exists today, we are very much a service-based economy — and moving more and more towards that."
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