Missouri voters face first opportunity since 1917 to eliminate income tax

(SeaPRwire) –   Voters rarely encounter a decision of this magnitude: whether to abolish the state’s individual income tax.

This question, set to appear on a Missouri ballot later this year, represents the first instance in over a century, since the inception of the modern income tax, that a U.S. state legislature has put the elimination of this tax to a popular vote. A “yes” vote would also grant approval for an expansion of the sales tax.

This distinctive Missouri proposal concludes a five-year period of extensive tax reductions across states, a trend that gained momentum when governments had ample funds during the COVID-19 pandemic recovery. This trend has only recently slowed as certain Democratic-governed states adopted increased tax rates for millionaires. Throughout this period, nearly every state implemented either permanent or temporary cuts to various taxes, including income, sales, property, or gas taxes. Furthermore, over half of the states with income taxes lowered their highest tax rates.

These tax reductions were infrequently balanced by increases in other tax categories. However, Missouri’s latest initiative implicitly recognizes the difficulty of abolishing an income tax without generating alternative revenues to sustain government operations.

Origin of the Income Tax

The 16th Amendment, ratified in 1913, granted Congress the authority to levy income taxes. Subsequently, numerous states, including Missouri in 1917, implemented their own income tax systems.

Conversely, certain states—Florida, Nevada, South Dakota, Texas, and Wyoming—never instituted an individual income tax, opting instead for revenue from sales taxes, oil taxes, or other streams. New Hampshire and Tennessee, which previously taxed income from interest and dividends but not wages, both repealed these taxes within the last five years.

Alaska stands as the sole state to date that implemented a general individual income tax and subsequently abolished it. Legislators repealed the tax in 1980, benefiting from substantial oil revenues.

In Massachusetts, voters rejected proposals to eliminate the income tax in 2008 and 2002. However, these ballot initiatives originated from citizens, not from legislators tasked with crafting the state budget.

States Pursuing Income Tax Phase-Outs

A Kentucky law enacted in 2022 decreased the state’s income tax rate and established revenue-dependent benchmarks that could progressively reduce the tax to zero. This law also extended the sales tax to include certain services, such as personal fitness training and website design. Nevertheless, these revenue triggers are not automatic, requiring the General Assembly’s approval for each subsequent income tax rate cut.

Last year, Mississippi passed legislation that will incrementally lower the income tax rate from 4% to 3% by 2030 and includes revenue growth targets that could activate further reductions. Complete elimination of the tax could span more than a decade, provided all benchmarks are met.

Oklahoma similarly enacted a law last year designed to initiate gradual income tax rate reductions tied to revenue growth, ultimately leading to the tax’s phase-out. However, the state will not ascertain until next year if it has achieved the revenue threshold necessary to trigger the initial tax-rate decrease.

South Carolina joined this trend a month prior, with Republican Governor Henry McMaster signing legislation that could eventually eliminate the individual income tax as state revenues increase.

Details of the Missouri Proposal

Missouri’s proposed constitutional amendment mandates the General Assembly to abolish the individual income tax through incremental reductions linked to revenue growth. To facilitate this, it empowers lawmakers to generate revenue by applying the sales tax to “any goods and services,” thereby circumventing a 2016 voter-approved constitutional prohibition against expanding the sales tax base.

The legislature would be granted a five-year period to determine which additional sales to tax, without requiring further public approval.

However, some voters might not fully grasp that they are authorizing an increase in sales taxes. The ballot language asks whether to phase out the income tax and “modify” the sales tax, deliberately omitting terms like “increase” or “expand.”

This amendment, recently approved by the legislature, is slated for the November ballot, unless Republican Governor Mike Kehoe schedules an earlier election.

Businessman Cites Tax Policy for Relocation

Governor Kehoe has prioritized the repeal of the individual income tax, asserting that it will stimulate the economy and draw in businesses and new residents.

During a House committee hearing earlier this year, Will Spartin testified that despite attending business college in St. Louis, he established the headquarters of his beverage companies in Florida due to its lack of an individual income tax. Spartin expressed a desire to return to Missouri, but only if it proves financially viable.

“Should Missouri proceed in this direction, even incrementally, it would send a significant message to individuals like us that Missouri aims to attract modern industries,” Spartin informed legislators.

Retiree Expresses Sales Tax Worries

Sharon Wells, a retired elementary school teacher from suburban St. Louis, stated that she paid several hundred dollars in state income tax last year. She fears her total tax burden could increase if the income tax is substituted with an expanded sales tax.

Wells employs someone for lawn care, visits a hair salon bi-monthly, and has regular medical, dental, and car maintenance appointments. None of these services are presently taxed, but all could become taxable under the Missouri proposal.

“I believe this is a significant error,” she remarked. “We are already spending considerably more than before on groceries, medicine, and various services. Prices for everything have escalated.”

Data Insights

According to an analysis by the nonprofit Institute on Taxation and Economic Policy, a family with an annual income between $49,000 and $78,000 would face an average tax increase of $535 if Missouri’s income tax is abolished and substituted with higher sales taxes. The organization indicated that lower-income earners would experience an even greater increase.

“It is quite evident that this will result in a tax increase for the majority of individuals,” stated Carl Davis, the institute’s research director.

Additional data indicates that while not the primary driver, income tax policies can influence interstate migration. In 2023, Texas, Florida, and Tennessee were among the top five states for net interstate migration of federal income tax filers, whereas high-tax states like California, New York, and New Jersey were near the bottom, based on a Tax Foundation analysis of IRS data.

Should Missouri’s referendum pass, “it might encourage other states to expedite their own intended income tax reductions,” commented Katherine Loughead, the foundation’s director of state tax projects.