As Missouri’s legislature heads into a special session next week to consider permanent tax cuts there are several things you should keep in mind: who is paying the highest percent of taxes in our state; the Hancock Amendment provides for giving surplus money back to the taxpayers; and if our legislature lowers taxes and that leads to future problems it will take a statewide vote to restore them.
To be debated during the special session is a proposal from Governor Mike Parson to reduce the top individual tax rate from 5.3 to 4.8 percent, which is a nearly 10 percent cut. He also wants to increase personal deductions, eliminate the bottom tax bracket, and approve some agricultural tax incentives. Combined, his proposals could cost the state nearly $1 billion in annual revenue.
A recent analysis of his tax-cut proposal shows that the top one percent of earners in Missouri would save $5,975 a year, while the lowest 20 percent would see no savings. But to put that into perspective, you should be aware of exactly who pays the highest share of their income in taxes in our state.
According to information recently released by the Institute on Taxation and Economic Policy for the entire country (www.itep.org), it is often the case that the poorest among us pay the most in local and state taxes, which would include sales, school, and other taxes levied by ambulance districts, etc. It is certainly the case in Missouri.
Missourians in the lowest 20 percent of family income pay 9.9 percent in state and local taxes. For the next 20 percent it is 8.8 percent, while the middle 20 percent pays 9.0 percent. The fourth 20 percent pays a bit more at 9.2 percent.
The top 20 percent pay the least amount in taxes. Those from 81 to 95 percent pay 8.7 percent of their income in taxes. The next four percent pay 7.8 percent.
Those in the 99th percentile of family income in Missouri actually pay the least amount of tax—6.2 percent. That is 3.7 percent less than families with the lowest 20 percent of income and 1.6 percent less than any other group.
Does Missouri’s highest tax bracket really need a cut?
The Hancock Amendment, which Missouri voters approved in 1980, requires the state to refund money to income tax payers when revenues are in excess of a percentage based upon the personal income of Missourians. If there is a revenue surplus greater than one percent of the revenue limitation, the state must refund the money to taxpayers. Refunds under the Hancock Amendment were issued to taxpayers in the 1990s.
We, the voters, established an amount of surplus we were comfortable with having under the Hancock Amendment. That amount was $3.8 billion in 2021. The state has a current budget surplus of about $1.8 billion, well below the level we established.
While Missouri has not reached the level required for refunds under the Hancock Amendment for more than two decades, the legislature did pass a bill to issue refunds this year due to a large state surplus. That legislation, however, was vetoed by the governor.
The Hancock Amendment also prohibits the General Assembly from increasing taxes or fees in any fiscal year that would produce "new annual revenues" in excess of either a specified dollar amount adjusted annually by the percentage of change in personal income or one percent of total state revenue. Any such increase would require a statewide vote.
That amount was $111.8 million in 2021. Parson’s proposed tax cut would amount to nearly $1 billion.
While Missouri does have a budget surplus this year—much of it due to an influx in federal COVID relief dollars—a permanent tax increase to reduce that surplus is not a responsible action to take. Neither is giving tax breaks to those who can most easily afford to pay their taxes, especially when they already pay the least overall.
Our legislators should consider their tax refund idea again as a safe way to protect our state budget in years to come. Only in the future, if we find out we are routinely collecting more tax revenue than we need, should a permanent tax cut be considered.