A lot of things have been written about the proposal to replace the state income tax with a consumer driven sales tax. Alleged “independent” analyses of various versions of proposals seemingly lumped together have been offered but none has addressed actual bills or initiatives with any fidelity.
The issue is not without humor. I got a huge chuckle from a liberal democrat blog posting titled “Independent Analysis: Sinquefield Sales Tax Plans Are “Fiscally Untenable…Pure Fantasy””. The analysis they reference was done by a well connected lobbyist. But really, with all due respect to Jim Moody who is a nice guy, calling him ‘independent’ is like saying Jimmy Carter was one of the best presidents in American history, he was just misunderstood. Neither will prove to be correct.
Rest assured the shortcomings of Jim’s ‘independent’ analysis will be forthcoming very soon. But in the meantime, here is some information for you to consider about some of the things you may be hearing about the various tax reform proposals.
The old saying that a rose by any other name is still a rose may be true but it glosses over the many variations and fragrances of roses. Case in point is that many of the opponents of tax reform want to confuse the proposals either purposely or unwittingly with the national “Fair Tax” proposal. The two proposals share the same goal of eliminating income taxes (the Fair Tax replaces all forms of income taxes such as Social Security, Medicare, etc) and replaces it with a consumer driven sales tax and a form of a rebate. That’s where the similarities end. It’s confusing and misleading to refer to the latter as a Fair Tax initiative.
In short, Missouri has suffered by relying on an income tax as a significant source of revenue. So United for Missouri supports repeal, and advocates for an increase in the sales tax rate. In addition, the sales tax would be applied to virtually all consumer transactions – on both goods and services, and capped at 7 percent. We call it the Missouri Jobs Act (MJA).
Why does this make sense? First, the evidence is compelling that an income tax drags down a state’s economy. Nine states don’t have an income tax, and those nine have far higher economic and population growth rates than the 41 without an income tax. Some opponents argue that the nine states without an income tax have some kind of special tax that Missouri could never replicate, such as oil royalties or tourism. In fact, four of the nine have no such advantage: South Dakota, New Hampshire, Washington and Tennessee.
Tennessee is noteworthy because it’s a border state with Missouri, and culturally similar. Until the 1950s, Missouri was far ahead of Tennessee economically, based on gross domestic product per capita. (Gross domestic product measures the value of all goods and services produced in a state.) But through the 1950s and the 1960s, there was an explosion of households that began paying the highest marginal income tax rate – 4 percent at the time. So income tax revenues soared.
In 1971, Missouri raised the top marginal rate to 6 percent, and the income tax collections poured in at an even faster rate.
As a result, income tax collections per capita grew an astonishing 125-fold from 1950 to 2009. But Missouri income per capita grew just 25-fold. It was during this period that Tennessee, with no income tax, steadily caught up with and surpassed Missouri economically, according to research published by the Show Me Institute.
Those who oppose the MJA say that it’s unfair to low- and middle-income families. However, the act closes more than 100 exemptions to the state sales tax today, most of which benefit higher-income earners. By taxing services, which tend to be used disproportionately by higher-income earners, the MJA helps ensure that all taxpayers are treated equally.
In fact, one of the top critics of the MJA, the Missouri Budget Project, once advocated for broadening the sales tax to include services, saying: “expanding the taxation of services could actually make the sales tax more progressive.” Indeed, there are few taxes more regressive – more hurtful to low-income families – than Missouri’s effectively flat tax.
The income tax is a business and job killing way to raise revenue. A broad sales tax, free of loopholes is a far more sensible tax policy.