Missouri Gov. Mike Kehoe has called for a phaseout of the state’s income tax, a move that would cause the most pain to the state’s low-income residents, says an expert on tax law at Washington University in St. Louis.
“Consider a lower-income taxpayer earning $30,000 annually and a higher-income taxpayer earning $100,000 annually,” said Sarah Narkiewicz, director of the Low Income Taxpayer Clinic at the School of Law.
“If both spend $5,000 on taxable goods with a 10% sales tax, both pay $500 in sales tax. However, $500 represents 1.67% of the lower-income taxpayer’s income but only 0.5% of the higher-income taxpayer’s income.”
Individual income tax, she said, is generally considered progressive taxation, meaning that higher earners pay a larger percentage of their income in taxes.
Kehoe proposes increasing sales taxes on services to help narrow the bridge of eliminating income taxes. Sales taxes on goods likely would rise as well. Missouri voters could be asked to consider a proposal in November that would eliminate the individual income tax and expand sales and use taxes in return.
Currently, nine states do not impose income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
“Eliminating state income tax appears attractive at first glance,” Narkiewicz said. “Most people would welcome keeping more of their income rather than paying it in taxes. Additionally, eliminating individual income tax might attract more residents and businesses to Missouri, potentially increasing state revenue through other means.”
However, she said, significant hidden costs may not be immediately apparent.
“State taxes fund essential services that residents often take for granted,” Narkiewicz said. “The state provides funding for K-12 education and public universities. It also finances Medicaid and health-care programs, maintains state roads and bridges, supports state police, handles state administration, funds conservation efforts and promotes economic development, among other functions.”
Currently, Missouri’s state income tax represents 60-70% of the general revenue fund that supports social services, education and health-care expenses.
“If Missouri eliminates this tax, the state must either generate revenue through alternative means or reduce services,” she said.
“New Hampshire and Texas both offer fewer public services compared to other states,” Narkiewicz said. “Alaska, South Dakota and Wyoming generate substantial revenue by taxing natural resource extraction. Florida, Nevada and Tennessee generate additional revenue through tourism.
“Missouri does not fit naturally into any of these categories.”
People often perceive sales tax as less burdensome because they pay small amounts incrementally, she said.
“Income tax is withheld from paychecks, paid through quarterly estimates or paid with annual tax returns,” she said. “These larger, more visible amounts create a greater psychological impact, making sales tax seem less burdensome. Whether this perception reflects actual tax burden is debatable.”
