Bills Aim to Eliminate Missouri Income Tax

By Andrew Veen
Policy Pulse Contest Winner

Andrew Veen

Two tax legislation bills on the docket in Missouri propose changes that could revolutionize the way residents pay taxes.

If passed, these bills (H.B. 318 and H.B. 814) would replace the corporate and personal income tax with a revenue-neutral flat rate sales tax on the purchase of new goods and services. The idea of a “flat” or “fair” tax is not a new one, but the emergence of these two pieces of legislation may bring the old debate out of the closet and back into the public consciousness. The ethical foundation for replacing the income tax with a sales tax is strong. Complete ownership of what one produces is a central tenet of freedom and a functioning market economy.

H.B. 318 and H.B. 814, sponsored by Chris Kelly (D-Columbia) and Edgar Emery (R-Lamar) are together better known as the “Elimination of Income Tax and Fair Tax Act of 2009.” The federal version of this proposal (FairTax) has lost momentum, but these bipartisan local bills seek to carry its intellectual torch to the people of Missouri.

The introduction of a flat-rate sales tax creates numerous tangible economic benefits. Most notably, it reduces disincentives to earn more. Under the current system, a worker may find himself willing and able to put in more time at work, only to bring home a smaller check if his increased income places him in a higher tax bracket. Also, a flat tax would place the choice of how much tax to pay — at least, to some extent — in the direct control of the taxpayer.

According to the Missouri Comprehensive Annual Financial Report for the 2008 fiscal year, $7.3 billion (over a third) of the state’s total revenue was generated through withholding taxes like the income tax. Supporters of the current system argue that the loss of that guaranteed stream of income for the state would render it incapable of properly fulfilling its roles and responsibilities. The income tax, they say, is vital.

It’s easy to understand why proponents of bigger government would be reluctant to switch from a withholding-based method to a pay-per-use method, because withholding taxes are nearly invisible to the average taxpayer. In a sales transaction, consumers know that they will have to pay some amount of tax. When buying a big ticket item like a house or a car, this amounts to a significant bill. Conversely, taxes like Social Security and the income tax don’t “come due” in a sense that would require the taxpayer to write out a check for the full amount. Either most of the bill has already been paid incrementally throughout the course of a year, or a refund is due. The inherently stealthy nature of this sort of taxation makes upward creep easier to ignore, and therefore easier to swallow.

As state expenditures and government programs continually grow, putting a full tax bill directly before the people of Missouri would provide a much-needed check on unnecessary expansion.

The most compelling argument offered by opponents of revenue-neutral taxation is that the poor are disproportionately affected. On a practical level, this is untrue. Those with higher incomes purchase relatively more goods and services, most of which are more expensive than those purchased by low-income families, and therefore pay more tax. Despite this, H.B. 814 has provisions to compensate families deemed to be impoverished or unduly harmed by the new tax methods, relieving them of any tax burden whatsoever.

So where does this leave the businesses? Opponents contend that businesses using state infrastructure in the process of making a profit owe something for that use, and argue that individuals shouldn’t have to shoulder the burden of running the state alone.

The economic response to this is to address how the tax will be paid. When a new tax is levied and consumers see an increase in the price of an item, they will purchase less of it. To compensate, businesses will seek a price level between the old price and the price-plus-tax in order to restore previous levels of sales — effectively splitting the cost of the tax with consumers.

Looking at this from the other side of the window, Missouri businesses currently pay income taxes. This would also contribute at least in part to a compensatory increase in price, above the price level that would exist without the tax, thereby 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 money that they take from their customers. So they’re not really a taxpayer, they’re a tax collector.”

H.B. 318 received its last bit of attention on March 11, and is now waiting to be advanced through the legislative process. If passed, Missouri will become the 10th state without an income tax.

This entry was posted on Thursday, May 14th, 2009 at 11:53 am. Responses are currently closed, but you can trackback from your own site.