July 13, 2011 08:40 AM
Let me introduce you to my grandchildren, Sydney and Brady, who live in St. Charles County. Even at such an early age, they show so much potential. Sydney and Brady’s mom and dad are both professionals who earn nice livings—and pay significant taxes on their income. Their work isn’t tied to the state of Missouri; they could easily find similar jobs somewhere else.
Like many young professionals, Sydney and Brady’s parents have considered moving to a state that does not levy an income tax. I am grateful that, so far, they have not decided to leave. However, they certainly understand that they could keep more of their hard-earned dollars—money that allows them to provide for Sydney and Brady—by moving to one of the nine no-income-tax states.
Why is an article on tax reform talking about grown children and grandkids? Because they are the future of our state’s economy, and they are also the ones most impacted by a state tax system that punishes achievement by taking more out of their paychecks. They wonder if their family would be better off in a state that taxes their spending choices and not their success.
Chances are good that you have read inaccurate representations of the tax reforms being proposed for Missouri. In a nutshell, the proposal supported by United for Missouri does the following things:
- gives all Missourians more take-home dollars in their paychecks,
- provides the basis for more jobs for our kids and their kids, and
- builds on a real-world working model on our southeastern border that demonstrates this can be done — and done successfully!
Simply put, this proposal eliminates the personal income tax and replaces it with a consumer-driven sales tax. United for Missouri feels that this is a solid, logical plan. Once you find out the facts, I believe you, too, will be a supporter of income tax reform.
Some say that Missouri is doing well; after all we are ranked eighth (8th) among all states for cost of living(1). However, growth in our gross domestic product (GDP) is anemic, and our unemployment rate frequently hovers at or above the national level, currently at a disastrously high 9.1%. Why settle for mediocre when the experience of others proves we can do better? Tax reform is one of the key elements to making Missouri the economic engine of the Midwest.
Picture the state budget as a pizza. When times are very good, it’s a super supreme pizza. You take a lot of ingredients (revenue sources) that the chefs (governor and state legislators) put together. They then bake the pizza in the oven (legislative budget process) and serve it to the customers (citizens of Missouri).
The tax reform proposal that we hope you will soon see on a Missouri ballot deals with one of the main ingredients of the “state budget pizza”: general revenue. It’s the key ingredient—it’s the sausage. Let’s look at what makes up the sausage:
In Fiscal Year (FY) 2010, the sausage ingredients (state general revenue) consisted of(2):
- Individual Income Tax – $4.4 billion
- General Sales Tax – $1.7 billion
- Corporate Income Tax – $287 million
- County Foreign Insurance Tax – $177 million
- Other – $144 million
These ingredients added up to around $6.7 billion.
The main ingredient in this general-revenue sausage is the individual income tax, which presents a lot of problems. Sometimes, you can’t find a sufficient supply. Lately, the suppliers (taxpayers) have had difficulty producing enough of the ingredient, and this has negative repercussions.
The chefs take for granted that there will always be a sufficient supply of ingredients, and they typically put none away for those times when the supply dwindles. They ignore the vital fact that their primary ingredient for the sausage (income tax) is very volatile and sensitive to economic trends. Rent seekers (those seeking entitlements or government favors) who are used to big slices of super supreme pizza are not happy. The chefs need to stop with the super supreme and serve up a pizza for which ingredients are available year after year. That’s what this tax reform proposal will do.
The proposal replaces only the individual income tax; it doesn’t have to replace any other source of revenue. This accomplishment is made possible by expanding the existing state sales tax base. It broadens the base of what is taxed currently by adding such items and entities as collection agencies, data processing services and cable television.
All local tax rates would be adjusted to account for the broader base, thereby creating lower local rates while collecting the same amount of revenue. The bottom line: Moving to a consumer-driven consumption tax puts the individual in charge of how much he or she pays in taxes, based on personal purchasing decisions. With an income tax, individuals are stuck with two undesirable options: make less money, or lobby for special favors from government.
How can we be sure this will work? We need only to look next door at Tennessee. There, we find is a real-world working model of the tax reform proposal. Tennessee has surpassed Missouri in population, pays its teachers more and attracts more businesses – especially large Fortune 500 headquarters – all the while maintaining a lower tax burden than Missouri.
Tennessee collected about $6.3 billion from its general sales tax of 7% in FY2010, on a narrower base than is being proposed in Missouri. It did this without taxing healthcare or pharmaceuticals; Missouri would not tax those sectors, either.
Based on a five-year general revenue average, a conservative estimate of revenue collections under the tax reform proposal is $7.3 billion, with the proposed 7% sales tax rate. This is slightly more than all general revenue collected for the five-year average period.
I often hear the questions “what about the poor? Won’t they be adversely impacted?” It’s a common misconception that the poor pay more of their income on essentials. Under the Tennessee model, a state need not worry about a rebate for the poor, because it does not tax the essentials that everyone, rich or poor, consumes (rent, daycare, used items, etc.). The same would be true in the Missouri tax reform proposal.
Those opposed to the proposal often distort it. They cherry-pick elements of various past proposals and combine them into one worst case scenario that is far different from what is being proposed. These opponents often call it the “Fair Tax” and describe it in the context of the federal tax reform model. However, the model being proposed in Missouri is based on the Tennessee state model, which has been in operation for more than 70 years. This is not the National Fair Tax, and it’s disingenuous to claim otherwise.
Another false claim made by opponents is that the proposed model taxes the sale of homes and business buildings. This is simply untrue. All real property sales will continue to be exempt from sales tax.
Signature collection, a key step in placing the tax reform initiative on the November 2012 ballot, is likely to begin later this year. When someone presents you with a petition, we hope that you will sign it. This is your chance to tell those who support the current, big-government-oriented tax system that it’s time the system worked in favor of the taxpayer, keeping our children and their children in Missouri for generations to come!
- Enterprising States 2011, US Chamber of Commerce
- Office of Administration, Budget and Planning FY2010 General Revenue
Carl Bearden is executive director for United for Missouri, an organization committed to educating and mobilizing citizens about the impact of economic policy on the state. Ed Emery collaborated on this column.