Bill Would Replace Missouri’s Income Tax with Sales Tax
By Jack Naudi
Show-Me Institute
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House Bill 814 at a Glance Name: Fair Tax Act of 2009 Key points:
Bill status: In House Tax Reform Committee. Last hearing, March 4. |
JEFFERSON CITY — Rep. Ed Emery (R-Lamar) is hopeful that the third time is the charm in his ongoing effort to revamp Missouri’s tax system. He has introduced for the third consecutive year a proposal to get rid of the state’s individual income tax, corporate income tax, and estate tax, and replace them with a broad-based retail and service tax at 5.11 percent.
The initiative, House Bill 814, would require voter approval for a constitutional change.
The bill is one of two in the House Tax Reform Committee that are part of the “Fair Tax” movement. (Indeed, H.B. 814 is called the “Fair Tax Act of 2009”). For several years, federal lawmakers have introduced legislation that would repeal — or partially repeal — the income tax and replace it with a sales or value-added tax.
Emery’s bill, along with a similar one introduced by Rep. Chris Kelly (D-Columbia), follows the federal model.
The fair tax bills have attracted skeptics and critics, and so far Emery has been ready for all of them.
For example, in a recent hearing held by the House Special Committee on Tax Reform on the Fair Tax bills, Rep. Jeannette Oxford (D-St. Louis) complained about exempting businesses from the income tax. A Springfield News-Leader article quoted her saying that business taxes are “patriotic dues.”
But, in an interview with the Show-Me Institute, Emery challenged that assumption.
“The fundamental economics of that question is: Who pays the taxes?” Emery said. “Corporations only have the money that they take from their customers. So they’re not really a taxpayer, they’re a tax collector.”
While H.B. 814 does away with corporate income taxes, it also does away with state tax credits. Such credits are typically given to companies that want to relocate or expand in Missouri. The trouble is, they don’t work. A recent story by the St. Louis Post-Dispatch noted that the state’s Quality Jobs tax credit program generated just 2,273 new jobs since 2005, while the state economic development officials claimed that the program had created 22,000 new jobs.
Eliminating the income tax, Emery figures, will be a more powerful incentive.
“Once you remove the (income) tax, I can imagine a Missouri delegation walking into a room where we’re bidding against other states for a major renovation of a plant,” Emery said. “We walk in with one page that says, ‘no income tax.’”
Studies released by the Show-Me Institute have concluded that replacing the income tax with a broad-based retail and service tax would have a number of desired effects. For starters, the income tax acts as a drag on growth because it provides a disincentive for workers to put in extra hours. On the flip side, the income tax poses a dilemma for employers who are forced to raise the pay of workers to compensate for lower net pay, which is reduced by income tax withholding.
Sales and service taxes can be controlled by individuals, who may alter their consumption habits, while income taxes cannot be avoided. Those who wanted to reduce their overall tax bills would be able to do so by putting off purchases or buying less expensive items and services.
“The most fair (part of the Fair Tax) is it taxes consumption, rather than income,” Emery said. “As a result, it doesn’t punish disproportionately people who are successful and make higher incomes. But just by the nature of people’s (spending) practices, it is a progressive tax. The wealthy tend to spend more than those who are less wealthy just by the purchases of the goods and services that they buy.”
Emery’s bill also calls for rebates to be given for each family, with lower-income families and larger families given larger rebates. This qualification answers critics who fear that imposing a broader-based sales tax would be regressive — meaning that poorer people would pay a disproportionate share. Instead, impoverished families would likely pay no taxes.
Jack Naudi is a researcher and writer for the Show-Me Institute.
May 14th, 2009 at 11:56 am
[...] splitting the difference with the consumer anyway. In an interview with the Show-Me Institute, as quoted on the Policy Pulse website, Emery addressed this concern on an even more theoretical level: “Corporations only have the [...]