The first-year cost of a House-passed proposal to eliminate the Missouri income tax ballooned to $4.2 billion under revisions made in the state Senate that were called “drafting errors” Monday during a committee debate.
Despite the potential costs, and misgivings of some Republican members of the Senate Fiscal Oversight Committee, the bill passed Monday afternoon on a 6-3 party-line vote. The proposal would place a constitutional amendment on a ballot later this year asking voters if they want to give lawmakers the power to increase and expand sales taxes to replace the income tax.
The committee debate was a preview of what is expected when the bill reaches the full Senate. Democrats focused on maintaining services like public schools, while Republicans focused on the growth of state government.
“It is not hyperbolic to say we are going to be in tight straits,” said state Sen. Maggie Nurrenbern, a Kansas CIty Democrat. “I do not know how we are going to pay the bills.”
Families will find it easier to pay the bills without a state income tax, said state Sen. Rick Brattin, a Republican from Harrisonville.
“It is incumbent on us to make the tough decisions that every single family has to make every single day,” Brattin said.
Eliminating the income tax is Republican Gov. Mike Kehoe’s top priority for the year. It has generated opposition from a wide-spectrum of advocacy organizations, including business groups like Associated Industries of Missouri and the Missouri Association of Realtors.
When the proposal left the Missouri House, the only potential cost for the coming fiscal year was the $9 million estimated to be the price for adding it to a statewide ballot. If approved, the potential cost for the following fiscal year was $49 million as provisions take effect, with the first big hit — up to $1 billion — on the $13.4 billion in annual general revenue receipts would come in the year ending June 30, 2029.
The cost exploded under the Senate version because the first tax cut would take effect on Jan. 1, 2027, as revenue in the first six months of the fiscal year is compared to the revenue from the entire previous year. The result would be an immediate reduction in the top income tax rate from 4.7% to 3.1% and the loss of $4.2 billion.
By the end of fiscal 2029, the income tax would be almost eliminated and the reduction in general revenue would be approximately $8.5 billion.
State Sen. Rusty Black, a Republican from Chillicothe who chairs the Senate Appropriations Committee, called the language that compares a half of a year of revenue to a full year of revenue a “drafting error” that “will have to be fixed, in order for this to be passed.
The intent, he said, is to allow lawmakers time to write a new sales tax law that would raise the revenue necessary to replace the income tax.
“I do not want to be in charge of the appropriations committee that’s losing $8 billion dollars, and I don’t believe that’s what the plan is,” Black said.
Under the language that will go to the full Senate for debate, the top income tax rate would be cut by one-one-hundredth of a percentage point for every $20 million of revenue that the state received in a base year that was in excess of the revenue received in the following six months of a new fiscal year.
The maximum rate cut of 1.6 percentage points would occur when the difference is $3.2 billion or more.
When the measure passed the House, it included a three-year window for lawmakers to write new tax laws that raise revenue to replace the income tax. It would exempt the new law from constitutional provisions prohibiting sales tax on real estate transactions, goods and services currently not subject to the sales and that taxes on gasoline and diesel must be spent on highways.
The exemption that would allow a sales tax on fuel purchases — the first time in Missouri that fuel has been taxed by price instead of volume — was also called a “drafting error” by House sponsors but the provision was not removed.
To obtain the revenue raised by the income tax without adding new items to tax, lawmakers would have to increase the sales rate — currently 3% for general revenue — by as much as 8.5%. To maintain the sales tax rate at the current level, lawmakers would have to expand its coverage to find another $300 billion of economic activity to tax.
Democrats on the committee warned that the immediate revenue reduction under the Senate version would result in devastating cuts to services while at the same time taxing Missourians for every marketplace transaction.
This will create the most massive tax increase in the state’s history,” said Senate Minority Leader Doug Beck, a Democrat from Affton. “It will shift the burden to the middle class and the lower middle class and those who can’t afford it.”
This story was originally published by the Missouri Independent.
