Income tax cut plan heads to Missouri Senate floor for debate

The Missouri Senate this week will debate an income tax cut that doesn’t immediately lower rates as much as Gov. Mike Parson proposed but would, if passed, promise future reductions.

Under a proposal passed on a party-line vote Monday in the Senate Appropriations Committee, the top state income tax rate for next year would be 4.95%. If state revenues continue to grow at a steady rate, the top tax rate would fall to 4.5% when the bill was fully implemented.

In the vote, 10 committee members, all Republicans, supported the bill and three, all Democrats, were opposed.

Parson called lawmakers into special session and asked that they cut the top tax rate to 4.8% as part of a package of cuts intended to decrease state revenue by $700 million annually. The bill approved by the committee would make a smaller immediate reduction in revenue but cost more in the long run. Official estimates were not available Monday.

The plan, sponsored by Sen. Lincoln Hough, R-Springfield, is intended to achieve the tax cut Parson is seeking while quieting concerns that cuts occurring too quickly could deprive the state of revenue necessary to maintain public schools and other programs.

Hough said after the committee vote that he has been speaking with the 33 other senators to get their input so the bill can be passed quickly in a chamber that saw months of strife between GOP factions during this year’s regular session.

The committee also approved a bill, sponsored by Sens. Sandy Crawford, R-Buffalo, and Karla Eslinger, R-Wasola, identical to the tax cut Parson proposed, but Hough’s bill is the one that will come up for debate first.

Along with an income tax cut, Parson asked lawmakers to approve a package of tax credits and other incentives intended to support the state’s rural economy by increasing the use of biofuels, building livestock herds and encouraging small meat processors to expand operations. Both the Senate Appropriations Committee and the House Agriculture Committee approved separate bills Monday containing those proposals. 

Senate Majority Leader Caleb Rowden, R-Columbia, said he intends to bring the income tax cut bill to the floor on Tuesday.

Parson called lawmakers into special session after vetoing a $500 million plan for tax rebates and a bill with the rural incentives. He said the tax rebate plan was underfunded and he wanted a permanent tax cut. The rural incentives bill he vetoed, Parson said, was flawed because it set a two-year sunset on the programs. Parson wants a six-year sunset.

Parson has said the state can afford a permanent tax cut because of the massive general revenue surplus and continued strong growth in revenue.

The state general revenue fund held $4.4 billion at the end of August and growth so far in the current fiscal year is almost 24%, 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.

Under current law, the top income tax rate will, if the trigger for revenue growth is met, fall one-tenth of one percentage point each year until it reaches 4.8%. The trigger in current law is set at $150 million in new revenue.

Hough’s income tax cut proposal would:

• Reduce the current top rate, 5.3% on incomes of about $9,000 or more, to 4.95% on incomes greater than $7,847, for 2023.
• Cut the top rate another 0.15%, to 4.8%, for 2024 if revenue grows by $175 million or more in the fiscal year that ends June 30, 2023.
• Reduce the top rate three more times, by 0.1% each time, when revenue receipts are $200 million more than received in the highest of the previous five years.
• Exempt the first $1,000 in earnings above the standard deduction from income taxes.

During the hearing, supporters of the bill said it will spur economic growth while opponents questioned whether the state will have sufficient money to pay for public needs.

Missouri has not matched the rest of the country in economic growth in recent years, said Aaron Hedlund, chief economist at conservative think tank the Show Me Institute. States without an income tax are doing better, he said.

“The more we can reduce rates, the more we can accelerate growth,” he said.

Opponents warned that the prospects for a recession mean the state could quickly burn through the surplus and run short of money.

“If you are going to make a mistake of this magnitude, don’t be in a hurry to do it,” said Otto Fajen, lobbyist for the Missouri National Education Association.