Take two steps into the Missouri Statehouse this session and the words “income tax” will inevitably come up. 

That’s because the General Assembly is debating House Joint Resolutions 173 & 174. The resolutions propose gradually eliminating the state’s income tax. It would also authorize the legislature to offset any losses by expanding the sales tax base or rate.

The proposal states that if net revenue collections exceed fiscal year 2027’s collections by $20 million or more, it would trigger a one-hundredth of a percentage point reduction in the state’s top tax rate. Those targets would be adjusted for inflation. Once the rate dips below 1.4%, the rate is instead zero.

The state’s top tax rate currently is 4.7% on any income that exceeds $9,191. 

The legislation’s target date to get rid of the income tax is 2032. Once it’s eliminated, the state would not be allowed to reinstate an income tax in the future.

In exchange, the legislature would have broad authority for the next five years to increase sales tax rates or expand the base of goods and services that could be taxed without approval from voters.

Currently, the legislature is limited by the Hancock Amendment to $144.4 million in what new fees or taxes could generate without needing voter approval. Due to a 2016 amendment, it also cannot expand the sales tax base beyond what was already subject to it before 2015.

If it passes both chambers, voters will still need to approve the measure at the ballot in November. 

The legislation has drawn stakeholders from across the state. During a Senate committee public hearing on April 1, so many people showed up to testify on the legislation, for and against, that they spilled into the hallway where they waited to be called in.

Starkly opposing narratives were heard.

On one hand, advocates say eliminating the tax will encourage economic growth, increased savings and more government transparency. On the other hand, opponents say it would add  the burden of an increased sales tax on people least able to afford it.

The outcome is far from straightforward. 

Sarah Narkiewicz, director of the Low Income Taxpayer Clinic at Washington University in St. Louis, said that while there is some merit to the plan, change inevitably brings some downsides.

“The idea is that by reducing the income tax, you’re going to bring in industry, you’re going to increase jobs, people are going to have more economic spending power,” Narkiewicz said. “The downside in this case is that in order to eliminate the revenue from the state income tax, which is about 60% to 70% of the state’s general revenue budget, we have to come up with that money from somewhere else, or we have to drastically cut services, or both.”

A boost to economic growth

Many of the arguments for the proposal center around boosting economic growth and making sure Missouri stays competitive.

Advocates have pointed to the success of the nine states without an income tax as reasons for Missouri to consider this path and as models on how to do so responsibly. Those states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Washington does impose capital gains taxes on those that earn more than $1 million a year.

In 2024, Missouri ranked 36th in the nation for state gross domestic product per capita, according to Statista. All nine states without an income tax ranked higher.

Since 2010, Missouri’s net population has increased by 0.31%, Pew research found. The states without an income tax had a net population increase greater than Missouri’s.

Proponents are confident that the proposed plan will not throw off the state’s budget because it uses revenue triggers to implement income tax cuts. 

“That phased approach has worked very well in preventing shortfalls through the cuts,” said state Sen. Curtis Trent, a Republican representing Barton, Dade, Greene and Webster counties who is the bill handler on the Senate side.

“Of course, this is a replacement policy, and so there are guardrails we think are sufficient to make sure there’s no drop in the budget, because that’s certainly not the intent.”

The bill only authorizes the legislature to make changes to the sales tax and does not directly affect it yet. 

Sen. Ben Brown, a Republican representing Franklin, Gasconade, Osage and Warren counties, said that if the proposals were the only pieces of legislation to pass, the rate would likely continue to tick down on its own with current revenue growth.

The added language allowing for sales tax adjustments could helps speed up the income tax elimination process and simplify the tax code by reconsidering exemptions, said Elias Tsapelas, the director of state budget and fiscal policy at the libertarian Show-Me Institute. The institute testified in favor of the legislation.

“If the legislature wants to do it faster, modernizing the state’s sales tax base is going to be something that speeds it up,” Tsapelas said.

There are multiple ways in which that can be done.

One way is by expanding the base of what can be taxed. One example would be taxing subscriptions on digital services since their prevalence in consumer spending has grown significantly.

“For instance, I’m looking at a document I have up in Microsoft Word,” Tsapelas said. “Ten years ago, we might have went and purchased a disc of Microsoft Word, and I would have paid the sales tax on it. Now, I get it from Microsoft, and it’s technically software as a service, so I don’t pay sales tax on it.”

Another option is raising the sales tax rate on the goods and services already being taxed. It is estimated that the state sales tax rate would have to be raised to somewhere between 12% and 15% if the base is not expanded at all. 

Legislators have said that is unlikely that will be the case. Brown told The Beacon he didn’t believe the assumption that the sales tax rate would increase significantly would come true. Trent, in an interview with Missouri Independent, said the highest rate voters would accept is about 6%.

The end result would likely be a mix of rate increases and an expansion of the base.

Brown acknowledged that it would be up to future legislators to withstand requests for industry-specific exemptions in order for any sales tax changes to succeed as intended.

“Financial situations can vary from year to year, and that’s something that’s going to take a great amount of agreement and compromise on. … And I think the only way it happens is if the legislature as a whole can stay very disciplined as to keep that sales tax rate either below where it is now or somewhere relatively close to where it is now.”

‘An odd duck’

Missouri is in a unique position compared to other states that have eliminated their income tax.

“I don’t think there are any states that have completely gone from a system where income tax is the primary source of revenue to eliminating the income tax, at least not in a very, very long time,” Narkiewicz said. “Tennessee just eliminated it, but it was a very small percentage. It wasn’t a true income tax. We’re kind of in a brave new world, and it’ll be interesting.”

Tennessee has often been referenced as the state most similar to Missouri in terms of economic makeup.

Income tax made up about 2% of Tennessee’s revenue when it began eliminating its income tax in 2016, largely because it had never taxed earned income and instead only taxed interest and dividends.

In comparison, income tax makes up roughly 65% of Missouri’s state revenue. The state has already forecast lower revenue for future fiscal years while debating the budget.

States that have eliminated the state income tax also have other industries like natural resources, gambling and tourism that make up the bulk of revenue. 

“The argument … is that if Missouri cuts this income tax, we’ll be just like these other states and be economically successful,” Narkiewicz said. “We’re a little bit of an odd duck there. We don’t have a lot of the advantages that these other states have.”

Eliminating state income tax typically comes with tradeoffs in other areas, Narkiewicz said, with one being in the form of higher sales taxes. Tennessee has the second-highest combined state and local sales tax rate in the country, according to the Tax Foundation. Missouri ranks 12th.

Wesley Tharpe, the senior adviser for state tax policy at the Center on Budget and Policy Priorities, said forgoing the income tax revenue also means less money for things like education, affordable housing and transportation.

Those factors can come back to bite states when a business considers the totality of what a state has to offer before moving there.

“The track record of other states is that both individuals and businesses and investors are not looking narrowly at one specific attribute when they’re thinking about where to live or to work or to start a business,” Tharpe said. “They’re going to be looking at the whole package of what a state offers. Taxes are certainly going to be one thing that any rational person or a company takes into consideration, but they’re also going to be thinking about the local quality of life.”

Some business lobbying groups have stepped forward in opposition, saying Missouri is already an attractive place to do business and the proposal doesn’t protect businesses from paying sales taxes on materials used for goods that would also be subject to sales tax.

Missouri is not the only state contemplating income tax eliminations either, meaning it could become a race to the bottom with other states.

“If every state cuts down their income tax, then what does Missouri have to offer that is going to make it stand out in terms of the actual cost for eliminating state income tax and potentially expanding the sales tax base?” Narkiewicz said.

The proposal still faces several key votes and the ballot box before the impacts materialize. It will be heard next on Monday by the Senate Committee for Fiscal Oversight, where it will need approval before heading to the full Senate floor.

Related