Does Amendment 3 Damage the Missouri Fair Tax?

As the election approaches, issues on the ballot start popping like champagne corks on New Year’s Eve!  Sometimes the corks go in harmless directions and other times…

A discussion of Amendment 3 has been taking place among the Fair Tax supporters in Missouri.  As with most things, there is information that is accurate, information that is partially accurate and information that is not accurate at all.  This is an attempt to clarify the issue and why Amendment 3 is not harmful to passing the Missouri version of the Fair Tax.

First, it is important to point out that the Missouri version of the Fair Tax, known as the Missouri Jobs and Prosperity Act (MJPA) has some of the same ideas as the National Fair Tax but has changes that reflect a state model.  For the purpose of our discussion here, any mentions of the MJPA will be referencing the Senate Substitute #3 for Senate Joint Resolution 29.

Contrary to some information floating around the internet and on flyers, Amendment 3 was not launched as a pre-emptive strike on the MJPA.  The transfer tax has been a concern and issue that has been around for a while.  Thirty-seven (37) states already have some form of transfer tax in place either at the local level, the state level or both.  Everyone of Missouri’s neighboring states has a transfer tax of some kind.

I noticed that Representative Jeanette Mott-Oxford, speaking on behalf of Citizens for Tax Justice a liberal, wealth distribution supporting organization, said the legislature would never think about authorizing a transfer tax.  A transfer tax could very easily be authorized at the local level as legislators don’t have to vote to implement it, they just give permission for localities to put it on the ballot as an option.  It happens all the time with hotel/motel taxes and others.  Remember, Ronald Reagan said “never say never” and this is a perfect application.

There appears to be two primary objectives to Amendment 3 from MJPA supporters:

  1. Exempting new home sales would increase the rate necessary to remain revenue neutral.
  2. If you exempt new homes, you will have to exempt lots of things.

We will address both items.

Impact of exempting new homes sales

While the transfer tax itself was not aimed at derailing the MJPA, the addition of the sales tax prohibition was very much a result of the MJPA.  The Realtor Association was a very vocal opponent of the MJPA because it taxed new homes and it taxed the Realtor service.  On this point, the supporters of the MJPA are correct, but what is the real impact?

It is projected that new home sales make up 5-6% of all home sales.  Under the MJPA, the sale of a “used” home would not incur a sales tax but the sale of a “new” home would.  The reasoning is that taxes that are currently hidden in the price of a new home would no longer be collected as business to business transactions are not taxable under MJPA. Only the final purchase by the consumer would be taxed.  This would save money as the taxes do not just get piled on and re-taxed etc.  It also would bring to light the level of taxation we pay.  But what about the impact of exempting new home sales on the rate?

The MJPA establishes a Constitutional cap on the sales tax rate.  When the rate (7%) was calculated using personal consumption and economic data during the past session, it was unnecessary for the state to collect the full 7% in order to maintain revenue neutrality.

I went back and looked at the data used in the calculations and found that if new homes sales were removed from the sales tax base, the rate collected would have to increase by less than .02%.  Since the calculated rate was already significantly under the cap, this .02% will not cause the rate to be higher than the cap.

Exempting new home sales opens the flood gate to exemptions

In an ideal world, there would be no exemptions under a fair tax approach whether at the state or federal level.  A prebate/rebate would be provided to all to offset the affects of taxing everything and result especially in the lower income people from being adversely impacted by the fair tax approach.  Unfortunately we don’t live in that ideal world.

The MJPA contained several exemptions:

  • Motor fuels
  • Insurance premiums or equivalent fees
  • Education (K-12, higher education, vo-tech)
  • Charitable donations and purchases
  • Federal Programs

Each of these exemptions has a specific purpose and application.  Contrary to the assertions of the opponents of MJPA, the exemptions are not in the bill to “buy” groups off but are driven by the need to be consistent in the approach of taxation.

Take motor fuels.  You can add a sales tax to the motor fuels on top of the excise tax currently levied like Illinois does, but every dollar collected has to go into the transportation fund and cannot be used to offset the replacement of the income tax. Each exemption has a similar reason.

New home sales are not currently included in the Bureau of Economic Analysis (BEA) of Personal Consumption Expenditures (PCE). In calcualting the rate for the MJPA, new home purchases had to be added into the base as they are not considered personal consumption.  In fact, if the fair tax approach is to not tax investments, then the point that homes should not be taxed as they are the largest investment most people will make in their lifetimes, seems to be a fair point of discussion.

The bottom line is the passage of Amendment 3 does not damage the chances of the Missouri Jobs and Prosperity Act passage.  In fact, I would argue that it actually removes a major obstacle that opponents of the measure would otherwise be able to use.

Ultimately, the voters will decide whether this is an acceptable exemption.  That’s the way it ought be!

Carl Bearden
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2 Responses to “Does Amendment 3 Damage the Missouri Fair Tax?”

  1. Brett says:

    As I mentioned just now on the other Prop 3 post, I think the exemption to be concerned about next is rental housing.
    Certainly that would be one area of objection once all housing is exempted. Unlike owner occupied housing, rental housing is clearly not an investment as well, nor am I aware of a tax related reason for exempting rental housing.
    That certainly becomes a stronger objection now though with Prop 3 in place; that rental housing is taxed while owner occupied housing is not. While there are strong reasons to tax rental housing, and rental housing is not going to soar in cost even after tax, new housing will realize the reduced cost benefits (and to a lesser extent, existing housing) of the fair tax while rental housing will not; those benefits are captured primarily, and possibly solely in many markets, by the landlord.

    • Carl Bearden says:

      Valid point to be concerned about. However, there is a distinct difference.

      Amendment 3 addresses the sale of a home. The rental “service” provided is quite different.

      Your point is well taken that there will likely be those who use the “same as” argument on this issue. However, we may have to have my 3-year old granddaughter come in to explain to them how one of these things are not like the other!

  2. […] #3 would have on the chances of passing the Missouri Jobs and Prosperity Act.  As I wrote in Does Amendment 3 Damage the Missouri Fair Tax?, I don’t believe it harms it at […]

  3. […] #3 would have on the chances of passing the Missouri Jobs and Prosperity Act.  As I wrote in Does Amendment 3 Damage the Missouri Fair Tax?, I don’t believe it harms it at […]