Flush with cash, the state should turn to those who know how to use it best.
Flush with cash, the state should turn to those who know how to use it best.
L ike participants in a hot-dog-eating contest, Missouri lawmakers are in danger of racing through too much of a favorite food for their own good — or anyone else’s. That food is taxpayers’ money.
After a onetime injection of $2.7 billion in Covid-19 relief money, and with record anticipated Missouri tax receipts for fiscal year 2022, lawmakers are feasting their eyes on more money than they can usefully spend. How should Jefferson City deal with this double windfall?
The answer is not to ramp up unneeded and unwanted government services. Instead, it is to put the maximum possible amount of this excess into the pockets of those who know how to use it best — that is, state and local taxpayers. The people of Missouri — not government bureaucrats — are the best judges of their own needs, which now certainly includes extra help in paying for the rapidly rising costs of everything from groceries to clothing and from gasoline to rent.
Recall how we got here. The American Rescue Plan Act (ARPA), passed into law in March of 2021, showered states and local governments with hundreds of billions of taxpayer dollars. Beyond the overriding expectation that the money be used to mitigate negative consequences of the pandemic, ARPA placed few restrictions on the use of the funds. Surely that expectation should include addressing the undeniable economic pain that hard-working Missourians and other Americans are suffering as a result of inflation now running at levels not seen for decades.
Wages have failed to keep up with inflation, which is now running at 8.5 percent. The average worker has consequently suffered a nearly $1,000 “inflation tax” through the reduced purchasing power of his earnings. Jefferson City can opt to send direct fiscal relief to Missouri workers to offset some or all of that loss.
The State of Georgia recently did something similar via an amended budget that earmarks more than $1 billion in tax refunds for people who file income taxes for 2021. The tax-rebate plan was passed by the state legislature and signed by Georgia governor Brian Kemp on March 16. Single filers will receive as much as $250, and couples filing jointly will receive up to $500.
If the Missouri legislature were to set aside $1.6 billion for rebates for people filing state income returns for 2021, it could provide refunds up to $417 for single filers and up to $834 for married couples filing jointly.
Tax rebates are one thing, and tax cuts are another. Tax rebates are appropriate for providing well-deserved tax relief, but as a temporary measure, they do little or nothing to make a state more competitive with others. Slashing or even zeroing income taxes — as eight states, including neighboring Tennessee have done — is a powerful mechanism for improving competitiveness. Income taxes are a tax on work, on investment, and on enterprise itself. That makes them the most damaging of their kind.
An over-reliance on the income tax as the primary source of state revenue is one of the main reasons why Missouri has lagged behind most other states in population and economic growth over the past two decades. Our state is more dependent on the individual income tax than all but seven other states; it generates about 50 percent of Missouri’s general revenues.
Other states have come to realize income taxes’ destructive effect. Sixteen states enacted or implemented income-tax cuts in 2021, according to Jared Walczak, vice president of state projects at the Tax Foundation. He calls it “the largest wave [in state tax cutting] in decades.”
Under federal guidelines, Missouri can’t use the bulk of the state’s $2.7 billion in stimulus money to cut taxes, but it can use $600 million of it. As long as state revenues stay above $10.8 billion — the pre-pandemic 2019 level of revenues — the state is free to draw upon a portion of stimulus money for tax cuts. State revenues for FY 2023 are projected to be about $11.4 billion. That’s $600 million above the inflation-adjusted 2019 threshold, and it’s usable money.
This is a golden opportunity for Missouri to accelerate a multi-year series of minuscule income-tax cuts first put into place in 2014. The state’s individual income tax stands today at 5.4 percent. It will drop to 5.3 percent this year, and it is scheduled to fall to 4.8 percent in 2028. In putting the $600 million to use for a tax cut, the legislature could drop the rate to 4.8 percent during FY 2023 — getting to a significantly lower tax rate almost immediately, while committing to the discipline of staying within the pre-pandemic spending level for several years.
Our lawmakers could send out refund checks to more than a million taxpayers across the state. At the same time, they could enact meaningful tax reform that would give a much-needed boost to the Show-Me State’s competitiveness. They should seize the moment.
Rex Sinquefield is the president of the Show-Me Institute, where Andrew Wilson is a senior fellow.