Missouri House Speaker Jon Patterson, R-Lee's Summit, presents his proposal for a statewide vote on eliminating the income tax Wednesday to the House Commerce Committee (Rudi Keller/Missouri Independent).
During Wednesday’s hearing on Gov. Mike Kehoe’s plan to replace Missouri’s individual income tax with an expanded sales tax, the key word was trust.
The proposed constitutional amendment giving the legislature three years to overhaul state tax policies is open-ended —- it allows lawmakers to impose sales tax on any financial transaction exchanging goods or services.
In his State of the State address, the only parts of the economy Kehoe put off-limits was agriculture, health care and real estate. And as he presented the proposal to the House Commerce Committee, House Speaker Jon Patterson said everything else was up to lawmakers.
The state’s revenue needs will be protected by revenue triggers — at levels unstated in the proposed amendment — as the individual income tax is reduced and finally eliminated, Patterson said.
“It will be up to you to decide what trigger do we want, and make sure that it’s done in a responsible way, so that we don’t have things that have happened in other states,” Patterson said.
“So we’re asking the people to trust the legislature to raise their sales tax, to raise any other taxes that they see fit and to trust politicians to make those responsible decisions,” said state Rep. Nick Kimble, a Kansas City Democrat.
“Well, not any more than they trust you now,” Patterson said, triggering a round of laughter in the packed committee room.
The proposal, as written, puts nothing off limits. It includes a three-year exemption to the Missouri Constitution’s requirements that tax increases win voter approval and that any tax “upon or measured by fuel used for propelling highway motor vehicles” be earmarked for road needs.
Patterson’s proposal seeks to end the personal income tax as early as Jan. 1, 2031. Income taxes on businesses and trusts would continue.
The committee did not vote on Wednesday. The next regularly scheduled meeting is next Wednesday and a vote could be held at that time.
If the measure is approved in both the House and Senate, it could be on a ballot as early as August.
The push to replace Missouri’s individual income tax is an effort to modernize the state’s tax structure, Patterson said. The individual income tax was first enacted in 1917 and a sales tax began in 1937.
The income tax is a drag on the state’s economy compared to states that have no personal income tax, he said. And the sales tax, which mainly applies to physical goods, is outdated because services, such as online streaming services, are exempt, he added.
“This is the first step in a long, methodical process that will take place if the citizens so choose to modernize our tax system and give people fairness in the tax system that we have,” Patterson said.
To bolster his arguments, proponents brought Aaron Hedlund, chief economist at White House Council of Economic Advisers, and Grover Norquist, founder of Americans for Tax Reform.
Hedlund is a former University of Missouri professor who now teaches at Purdue University.
About 25 years ago, Hedlund said, Missouri generated about 2% of the U.S. economy, while the share now is 1.5%.
“I’m sick of Missouri losing,” he said. “For 25 years, we’ve oftentimes been in the bottom 10 of economic growth. Prior to the income tax reductions that started about a decade ago, we were oftentimes in the bottom five at economic growth. People are voting with their feet, and they’re not choosing Missouri.”
Democratic members of the committee were skeptical of whether the tax proposal was the way to solve that problem. House Minority Leader Ashley Aune, a Kansas City Democrat, noted that Republicans have dominated Missouri politics for the past 25 years.
The GOP has controlled the state Senate since 2001, the Missouri House since 2003 and held the governor’s office for 14 of the past 26 years.
“I want to make the point that what we have been doing is not working,” Aune said. “I would posit that this is not the solution.”
Missouri’s personal income tax is almost flat, with a top rate of 4.7% on taxable incomes greater than $9,436. There are significant exemptions from the tax, including all Social Security payments, a share of retirement income and capital gains, which is profits from the sale of property or other assets.
The income tax generates about 65% of the state’s annual general revenue receipts, which were $13.4 billion in the year that ended June 30.
Sales tax is more complicated because local governments have a variety of levies they can put on the ballot. The basic state rate is 4.225%, with 3% dedicated to general revenue and the rest earmarked for public schools, conservation, state parks and soil conservation.
There are more than 50 locations in the state where the total sales tax is 11% or higher after adding local option taxes.
Matching the current revenue from the individual income tax without expanding the transactions that are taxed would require raising the sales tax to nearly 13%. .
One of the main focuses of testimony during Wednesday’s hearing was who would bear the greatest burden under an expanded sales tax. Opponents of the measure said wealthier Missourians would see their taxes decrease substantially while people of limited means will pay more in taxes.
After deductions, a married couple with a total income of about $36,000 pays no state income tax. The sales tax, however, would hit every purchase they make, opponents said.
Figures from the left-leaning Institute on Taxation and Economic Policy show that people in the lowest 20% of income pay about one-third more of their income in sales and other taxes in Tennessee, Texas and Florida than the same group in Missouri, said Jeremy LaFaver, a lobbyist for the Missouri Budget Project.
The top 1% of income earners in Missouri pay 5.7%, he said, while the same group in Florida pays 2.7%.
“They rely largely on consumer based taxes that impact low income, fixed income people,” LaFaver said.
For one lawmaker, reducing the burden on high-income earners is a benefit of the plan.
Wealthy individuals run the businesses that employ Missourians, said state Rep. Brian Seitz, a Republican from Branson.
“The wealthy pay way more in taxes,” he said. “The percentage may look smaller, but they actually paid quite a bit more, and they are the foundation of our state’s tax base.”
Dennis Ganahl, founder of Mo Tax Relief Now, said the transactions that would be taxed are those used by wealthier people.
“The people with the lower incomes are just buying goods,” Granahl said. “They aren’t buying CPAs or masseuses or dog walkers or hair stylists or pedicurists or manicurists. All those are services that are used by wealthier people.”
Lower income Missourians use services that would be taxed, Aune responded.
“That is one of the wildest things I’ve heard in this building, if I’m being honest,” she said. “And I’ve heard some crazy stuff.”
The Missouri Constitution currently bans sales taxes on real estate transactions and any transactions not currently taxed. Both were added to the constitution after initiative petition campaigns organized by the Missouri Association of Realtors.
The campaigns cost $4.3 million to protect real estate sales from taxation in 2010 and $5.6 million to add protections against sales taxes on services.
Jason Zamkus, a lobbyist for the realtors, reminded the committee in his testimony that voters approved both measures by wide margins. Kehoe’s statements that he wants to exempt real estate are not included in the proposal, he noted.
“While we appreciate the governor’s statement in the State of the State that it’s his intent not to impact the real estate industry, unfortunately, the proposals that are pending before you currently are silent on that issue,” Zamkus said.
The Realtors could be one of the most important opposition groups if the measure doesn’t include the protections for real estate sales.
“If we were willing to spend that much a decade ago,” he said after testifying, “we are certainly going to fight to protect it.”