Kevin Hardy, stateline.org
Missouri Republicans may make tax cuts efforts this year to new heights as lawmakers consider exempting profits from selling stocks, bonds and real estate from state income taxes.
It is part of a broader push to eliminate state income taxes entirely, and the law passing through the Capitol will bring unprecedented benefits to the wealthy by excluding long-term income from selling assets. If approved, tax experts say the law is the first time an income tax state has eliminated a capital gains tax.
Republican sponsors say the move will make the state more attractive to businesses and families.
“The bill is intended to stimulate Missouri’s economy,” Republican chairman Protem Perkins said when he introduced the measure.
But even some state Democrats and GOP colleagues have criticized the measure as an overly advantageous to wealthy people. Most state tax systems already place higher tax burdens on low-income households. That trend only accelerates at this year’s legislative session, and worries supporters who want to see the rich pay a bigger share.
“It’s so bad how badly we concentrate on the profits of the (Missouri) proposal. It goes to the richest people in the state, shifts the state’s tax system and really privileges wealth owners than those who are earning normal pay.”
The Institute advocates progressive state taxes. This is the largest tax burden proportionate to the highest income earners. Cooper has advised against the abolition of the state’s income tax, but said Missouri’s move is more harmful than eliminating income tax entirely.
“If you’re completely clearing up your income tax, at least the tax benefits can go to low-earning people who are still paying income tax,” he said. “If you just eliminate the income tax on capital gains, you’re just giving money to the wealthiest people in the state.”
Some democratically-led states, including Maryland and Washington, moved to increase taxes for the wealthy people this year. However, several states, including Kansas, Kentucky and Mississippi, are making more regressive tax changes.
Jared Walczak, vice president of state projects for the conservative tax foundation, noted that the state remains prioritizing progressive spending through social services programs that support the most vulnerable residents.
He said the federal government is competing with each other for business and residents much more immediately, much more immediately, than it competes with other countries.
“The state therefore focuses heavily on the competitive benefits associated with the growth promotion tax system,” he said.
“Generational Changes” in Taxes
Several states have enacted famous tax cuts this year, but momentum is actually slowing down, Walczak said.
In recent years, the booming economy and the influx of federal cash have similarly received significant tax cuts for conservatives and liberal states. Of the 43 states that have some kind of income tax, 28 have reduced their tax rates since 2021, Walczak said.
“In many states, lawmakers simply accomplished a lot of what they were trying to do,” he said.
He said the prospect of economic uncertainty and a decline in federal aid has made many lawmakers more cautious this legislative season.
But lawmakers from several states, including Oklahoma, South Carolina and West Virginia, continue to march to eliminate state income taxes.
“Taxing people’s wages is bad because it undermines freedom,” the Republican Oklahoma senator said this month in support of the proposed income tax cut, Oklahoma’s voice reported. “It undermines people’s freedom. If the government controls income, it controls your life.”
In this session, Andy Besher, of the Kentucky Democratic government, signed a bill that would reduce the state’s income tax rate from 4% to 3.5%. Republican lawmakers have been cut for years with the ultimate purpose of eliminating income taxes entirely despite concerns that more reliance on sales taxes will disproportionately burden the poor. To partially offset income tax cuts, Congress expanded its sales tax to more services in 2018.
Kansas Republican lawmakers overturned a veto from Democrats’ government, Laura Kelly, moving away from the state’s tiered income tax to a 4% flat rate tax that primarily benefits the highest incomes.
Last month, Mississippi Republican Gov. Tate Reeves signed a law allowing another cut in the state’s income tax. Officials there are aiming to phase out income taxes entirely in the coming years, thanks to a gradual tax cut that Reeves has characterized as a “generational change” in the nation.
Mississippi law also reduces sales tax on food and increases gas tax. The governor has already celebrated the end of the state’s income tax, but the law provides for incremental cuts over the next few years only if the state reaches certain income targets.
Legislative sponsor Republican Rep. Trey Lamar said income taxes would interfere with work.
“Tax on work is a tax on productivity,” he said.
A left-leaning institute on taxation and economic policy says the law makes state tax systems more unfair. The analysis found that, when fully conducted, the top 1% of households with an average annual income of $1.4 million receive an average reduction of $41,420, or about 3% in annual income. However, the bottom 20% of earners with an average annual income of $13,400 will deliver a tax cut of just $42 a year.
Lamar pointed out that the law does not raise sales taxes on a full scale. He said that elimination of income taxes will only help Mississippi workers because the average sales tax burden is lower than in neighbouring states like Alabama.
“There’s more people need to work,” he said. “So if helping a working man is somehow considered regressive, I have to say I don’t fully understand it.”
Tax Foundation’s Walczak said the state could afford a reduction in the initial tax rate. However, it is unclear whether the state’s income will meet the required targets and whether lawmakers will reassess their purpose to eliminate income tax.
As one of the poorest states in the country, Mississippi is heavily dependent on federal funds and is particularly vulnerable to recessions.
“There is no guarantee that states can afford Mississippi’s future budgets that Mississippi doesn’t have a big budget to begin with, so if the economy slips it’s going to be more difficult than most other states,” he said. “If the economy changes and you decide if a suspension is needed, then the legislators part needs to be motivated to be honest with yourself.”
Uneven tax burden
Economic uncertainty and slower revenues have put many states in budget holes this year, forcing lawmakers to consider cutting spending or increasing taxes.
To close the budget gap, some conservative and liberal countries are considering new or high taxes on marijuana, cigarettes and soda.
However, some liberal nations are looking for taxes that are more focused on the wealthy. In Rhode Island, Democratic Gov. Daniel McKey proposes a 10% tax on digital advertising revenue.
In Washington, lawmakers have approved a capital gains and business tax hike to close the looming deficit, but it is unclear whether Bob Ferguson, a Democratic government who has expressed skepticism, will register for those measures.
Maryland lawmakers are facing a $3 billion deficit and have recently approved a $1.6 billion new taxes and fees. This includes two new high income tax ranges and a new 3% sales tax on information technology and data services.
A move that calls for more wealthy people could make tax systems in some states more progressive, said Aidan Davis, state policy director at the Institute for Taxation and Economic Policy. However, most state tax proposals approved this year benefited primarily the highest incomes.
That is especially concerning, as most state systems support the wealthy. According to a research institute, the top 1% of income earners pay a lower effective tax rate than other groups in 41 states.
Missouri has the fate of the first capital gains tax being castrated.
The version of the proposal passed both rooms, but there are differences between Senate and House laws. This means the bill could either return to the conference committee for further negotiations or move on to Republican Gov. Mike Kehoe, who identified capital gains among his tax cut priorities this year.
The Missouri Department of Revenue estimates the exemption will cost $111 million a year. However, the Institute on Taxation and Economic Policy Analysis for IRS Data Projects said the change could cost more than $600 million.
If approved, the top 5% of Missouri households (people making more than $273,000 a year) receive more than 80% of their profits from capital gains exemptions, Davis said.
“In doing so, we can collect tax-free passive income for the wealthy while middle-class workers and savings continue to tax them,” Davis said. “That’s a really extreme proposal.”
Stateline Reporter Kevin Hardy can be contacted at khardy@stateline.org.
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