Missouri’s controversial income tax cut has been touted as an elixir for what ails the state’s economy. If other states’ experience is a guide, though, the benefits will be hard to see.
Lower taxes on their own should be good for growth, but states rarely cut taxes without cutting spending too. That’s OK if you think the state is wasting a lot of money, but not if the quality of critical services such as education is compromised.
Kansas, whose big tax cut became a rallying cry for anti-tax forces in Missouri, is not an encouraging example. Since the cuts took effect last year, Kansas has lagged the nation in job growth, income growth and business-creation measures, and a budget shortfall led Moody’s to cut the state’s credit rating last month.
“There’s no evidence of adrenaline pumping through the economy like Gov. (Sam) Brownback was hoping for,” says Michael Leachman, director of state fiscal research at the Center on Budget and Policy Priorities in Washington. “There’s not much reason to think that the tax cuts will kick in and you’ll have a boom.”
His think tank looked at six states that cut taxes in the early 2000s. Three performed better than average; three did worse. The above-average performers — Louisiana, New Mexico and Oklahoma — all benefited from an oil and gas boom.
The Show-Me Institute has published several studies that advocate reducing or even eliminating Missouri’s income tax. It cites examples such as Tennessee, a neighboring state that has no income tax and has outperformed Missouri in recent decades.
Leachman has read numerous studies of tax cuts, however, and finds little support for the notion that they lead to growth. “If you look at the serious economic literature, it’s not encouraging,” he says. “State and local taxes just aren’t an important factor in determining economic growth.”
Businesses will locate where they can best serve their customers and where they find the right workforce, transportation infrastructure and other amenities. A few percentage points of state income tax will rarely be the deciding factor.
One part of Missouri’s tax-cut package — a deduction of up to 25 percent of business “pass-through” income — is likely to be particularly ineffective, Leachman said. It benefits anyone who reports business income on their personal return, such as self-employed people and partners in law firms.
“This is very poorly targeted,” Leachman says. “A lot of small businesses who get a tax cut are businesses that have no employees besides the owner.”
Wage earners also get a tax cut beginning in 2017. Assuming that a revenue trigger is met — and it probably will be — the state’s 6 percent marginal rate will fall by 0.1 percentage point each year until it reaches 5.5 percent.
Proponents such as the Show-Me Institute argue that a lower rate will give people more incentive to work and deploy capital in the state. Leachman, though, says you also have to look at what it does to the state’s budget. “To the extent that makes it harder to fund schools and other public services, it can harm growth,” he said.
A true pro-growth tax change might have reduced rates in exchange for trimming or eliminating Missouri’s hodgepodge of special-interest tax-credit programs. Even the Show-Me Institute’s original idea — a revenue-neutral switch to higher sales taxes and lower income taxes — would have been better than what we got.
What we got is a package of poorly targeted benefits and uncertain costs that’s unlikely to provide the economic pick-me-up Missouri needs.