The endeavor to alter Missouri’s tax code came down to the wire with the legislature passing slimmed-down individual and corporate tax cut bills in the final hours of the state’s 2018 legislative session. This achievement is the product of six months of tough negotiations between the House and Senate to get an outcome that ensures a balance between those seeking pro-growth tax cuts and budget hawks anxious about possible revenue impacts. Nonetheless, the legislature has passed changes that will benefit the state for years to come and the Governor should do right by Missourians and sign these cuts into law.
On the individual side, the top marginal income tax rate is cut by .4 percentage points, from 5.9 percent to 5.5 percent starting January 1st, 2019. If the state meets revenue targets, individuals will see a gradual reduction to 5.1 percent by 2023. All taxpayers should view the cut as a significant victory, as nearly all individuals pay the top income tax rate since it kicks in at only $9,072 - far below the federal poverty line of $12,000. Unfortunately, this rate reduction does not have the same level of cuts and reform as two bills that an NTU-led coalition endorsed. HB 2540 would have cut the income tax rate to 5 percent, eliminated two of Missouri’s ten tax brackets, and streamlined the credit and deduction system. SB 617 would have cut the rate to 5.25 percent while also creating trigger to bring the rate down to 4.85 percent. While the legislature did not pass a final bill that enacted changes as comprehensive as originally proposed, it is our strong desire that they consider future reforms that adopt these positive changes.
Slashing the individual rate puts Missouri more in line with its eight neighbors, two of which (Iowa and Kentucky) recently enacted cuts to their individual rates. Since the average top income tax rate for Missouri’s neighbors is 5.11 percent, the cut to 5.5 percent is slightly higher than the rest of the region. When the tax rates fall to 5.1 percent Missouri will be on par with its neighbors. Of its eight neighbors, Arkansas has the highest rate (6.9 percent), followed by Nebraska (6.84 percent), Iowa (6.5 percent, down from 8.98), Kansas (5.7 percent), Kentucky (5 percent, down from 6), Oklahoma (5 percent), Illinois (4.95 percent) and Tennessee has no individual income tax.
The most significant change passed by the legislature is a substantial cut to the state’s corporate income tax rate, lowering it from 6.25 percent to 4 percent, a 2.25 percentage point reduction. Once the greatly reduced corporate tax rate takes effect in 2020, Missouri will have one of the lowest business tax rates in the country. While it is not ideal that there is a delay in the rate reduction, such a significant cut should still spur business optimism in all areas of the state in the interim. As NTU has noted previously, a low corporate tax rate makes Missouri a more attractive option to start or expand a business, increase investment, boost employment, and increase wages for workers.
This huge rate reduction not only makes it one of the most business-friendly tax environments in the nation, but provides Missouri a distinct advantage over its neighbors. The average top marginal corporate tax rate for Missouri’s neighbors is 7.26 percent, about two-thirds higher than Missouri’s new adopted rate. Of its eight neighbors, Iowa has the highest rate (9.8 percent), followed by Illinois (9.5 percent), Nebraska (7.81 percent), Kansas (7 percent), Tennessee and Arkansas (6.5 percent), Oklahoma (6 percent), and Kentucky with the lowest rate at 5 percent.
These tax cuts will make Missouri a more attractive place to live and operate a business. However, with states across the country and in the Midwest building upon the progress of federal tax reform and planning to reform their respective tax codes, lawmakers should not call their work done, but rather, a work in progress to deliver even greater relief to taxpayers.