Keeping the balance: Too much tax relief could spell budget disaster

April 21, 2023


missouri news network

JEFFERSON CITY — With a $6 billion budget surplus due to inflation and federal COVID-19 aid, many legislators this year see an opportunity to pass tax credits, reductions and exemptions.

This has the potential to decrease state revenue in the future — when the federal surpluses are gone — unless the state economy continues to grow.

In other words, the state may be able to afford to pass tax relief legislation now, but there could be consequences, such as cuts to funding for public education, transportation and more.

State lawmakers have filed nearly a hundred different tax relief bills this legislative session. While the dollar amounts vary wildly between them, “they all cost money in the long run,” said Rep. Peter Merideth, D-St. Louis, ranking minority member on the House Budget Committee.

Many of the tax relief bills come in the form of tax credits for individuals, businesses or other organizations. These credits are reductions in tax liability that individuals or entities would otherwise have to pay to the state.

Sen. Lincoln Hough, R-Springfield, who chairs the Senate Appropriations Committee, said tax credits factor into the overall amount the state can appropriate each year.

“If we have tax credit bills that total another $800 million in reductions in our general revenue,” Hough said, “that’s $800 million that we cannot spend, we cannot allocate, we cannot appropriate, for the priorities that people find necessary for their communities — for infrastructure, for education, for nursing homes, all of those things.”

Merideth said the long-term cost is important to understand, considering the state’s current financial situation. Right now, money is coming in that lawmakers are not planning to spend, Merideth said.

“That’s a really unusual situation for this state,” Merideth said. “It’s really never happened before where we’ve had this kind of money.”

He said that while sales tax and income tax collections have grown due to higher wages and costs of goods, government spending has not been adequately increased to meet inflation. With federal COVID-19 aid expiring, this could pose issues down the road.

“There’s a real concern that if we cut taxes now, and in five years we no longer have those unusual circumstances happening, we’re not going to have enough money to pay our bills,” Merideth said.

Hough said the concerns about long-term budget impact similarly applies to reductions in individual and corporate income taxes.On Oct. 5, Gov. Mike Parson signed an income tax cut bill following a special legislative session.

Hough said this was the largest income tax reduction in Missouri history. Fully implemented, it offers $1 billion in tax relief for Missourians.

Cutting taxes in a responsible manner is important, he said, with economic growth indicators that can trigger further tax reductions.

“When you’re writing a budget, what I didn’t want to do was go jump off a cliff and say, ‘Let’s cut a billion dollars in taxes and we’ll figure out how to plug the holes in the budget,’” Hough said. “It would be a train wreck.”

Hough said that if done in a measured and responsible way, as he believes last year’s tax cut was designed, tax relief legislation can have minimal long-term effects on the budget.

“As long as the economy continues to grow, we will have additional resources to plug into our communities and the things that our members feel are necessary to fund,” Hough said. “If you do the jumping off a cliff approach, we’re going to have a hard time writing a budget in years to come."

"So I would like to see these things be implemented over time in a responsible way,” Hough said.

Last month, the House passed HB 816, a $1 billion personal and corporate income tax cut. The bill also would exempt all Social Security benefits from state taxation.

Rep. Dirk Deaton, R-Noel, is the bill sponsor and House Budget Committee vice-chair. He said the state’s current revenue surplus, which continues to grow, allows this opportunity to return money to Missourians.

“Individual Missourians would have more money in their pockets,” Deaton said. “They can get to keep more of their hard-earned money, and that’s the beautiful thing about it.”

Deaton said he thinks the tax cut will lead to higher wages, more jobs, more investments and the creation of more businesses. In the long term, he said, it could limit government growth.

If passed, the personal income tax rate would drop from 4.95% to 4.5% on Jan. 1. At the same time, the corporate income tax rate would decrease from 4% to 2%, Deaton said.

Further cuts would only be triggered only if revenue continues to grow. When fully implemented, the corporate tax rate would lower to 0%.

“That’s the balance, that’s the protections that are in place for the fiscal health of state government,” Deaton said. “Making sure we continue to provide essential services like transportation, public safety, because, yes, it’s over a billion dollars in cuts, (but) there’s over a billion dollars in revenue that would have to be increased for all of the triggers to go into effect.”

According to the bill’s fiscal note, the fully implemented tax cut could have a yearly $1.3 billion impact on the general revenue fund.

Hough suggested that it may be too soon to move forward with Deaton’s bill. He said lawmakers should let the previous tax cut play out and be implemented over time before talking about further reductions.

He added that while other states don’t have corporate income taxes, Missouri is not losing businesses or economic growth because of the current corporate tax structure.

“Businesses that we talk to today are talking about workforce issues, education issues, making sure that they have qualified people to do the jobs that they want,” Hough said. “They’re not worried about a 4% corporate income tax rate.”

Deaton’s tax cut is widely criticized by Democrats, who compare this bill to Kansas Gov. Sam Brownback’s tax cut experiment that resulted in a massive budget deficit there.

Brownback championed income tax cuts in 2012. State revenue plummeted by $700 million and as a result, the government cut education spending in 2015. Kansas had a deficit of about $900 million in 2017.

House Minority Leader Crystal Quade, D-Springfield, said in a March 21 news release that the tax cut for corporations fails to address the needs of working families.

“Tax cuts may make wealthy GOP donors happy, but they don’t educate our kids, pay police officers or keep roads from crumbling,” Quade said.

Lawmakers have not seen the results of last year’s tax cut yet, which was only passed six months ago. They do not have a full year of tax revenue to analyze whether there was an impact, Merideth said.

“For them to already jump to ‘no, let’s do more’ is just irresponsible and it’s sort of classic, political, right-wing attitude of ‘cut taxes every chance you get,’” Merideth said.

Each time Republicans propose large tax cuts, Deaton said, Democrats make comparisons to Kansas and say funding to state services will be decreased.

“State government has a bigger surplus, and we’ve made larger investments in these programs than ever in our history, so it’s been the exact opposite of what’s been said,” Deaton said. “I expect the very same thing to be true in this instance.”

Deaton said he is willing to try to work with those who have concerns, but he is confident the state economy will continue to strengthen and keep revenue coming in.

“We’ll make sure we see revenue growth, which hopefully will help with the concerns,” Deaton said.

Tax credits and exemptions

Other tax relief bills have received bipartisan support. HB 133, sponsored by Brad Hudson, R-Cape Fair, progressed to the Senate and was passed by the Senate Economic Development and Tax Policy Committee on Thursday.

Hudson’s bill establishes the “Entertainment Industry Jobs Act” and offers tax credits to entertainers who rehearse in Missouri. This tax credit can be used for rehearsal and tour expenses.

The goal of the legislation is to encourage and incentivize artists to work with Missouri companies, which will ultimately help to create jobs, Hudson said during the House’s March 6 session.

The bill limits the total entertainment tax credit amount to $8 million for a single fiscal year, but an additional $2 million may be issued if that initial cap runs out, according to the bill’s fiscal note. This means the total general revenue fund cost for fiscal year 2025 could reach $10 million.

Democrats have also sponsored tax relief legislation, but those generally prioritize eliminating state sales taxes on food, diapers and feminine hygiene products.

SB 143, sponsored by Sen. Doug Beck, D-Affton, is one example, and it could affect future state budgets. The bill passed out of the Senate April 6 with bipartisan support alongside SB 131 after Democrats and Republicans came to a compromise. Beck's bill is scheduled for a vote by the House Special Committee on Tax Reform next week.

Beck’s bill exempts diapers and feminine hygiene products from sales tax, as well as grants tax credits for people who buy groceries in food deserts. The bill also increases the tax credit limit for food pantries, soup kitchens and homeless shelters from $1.75 million to $2.75 million.

The tax relief outlined in the bill could cost up to $64 million each fiscal year, according to its fiscal note.

SB 131 is sponsored by Sen. Rick Brattin, R-Harrisonville, and exempts ammunition and firearms from sales tax. The bill also gives tax credits to ammunition and firearm sellers to cover the federal tax on those items.

The bill’s fiscal note outlines that in fiscal year 2024, this tax relief could take $58.5 million from the general revenue fund. It would additionally cost other state funds up to $25 million.

In fiscal year 2025, however, it could cost general revenue up to $83 million, and other state funds up to $30 million. The House Ways and Means Committee is scheduled to hold a hearing on that bill next week.

Hough said that ultimately, it all comes down to balance. He said it is important to have an “advantageous tax code” to grow the economy, keep and bring people to Missouri and help people want to be here.

“We need to make investments in infrastructure, we always need to make investments in education and our workforce development, our apprenticeship programs, things like that,” Hough said.

“If we don’t have the resources to do that, our economy’s not going to grow, and people won’t move here," he said. "So it’s all a balance.”