Misunderstanding surrounds state tax laws, policies

Friday, October 18, 2002

Editor's note: This is the second in a series on the declining fiscal fortunes of Missouri's state government and their effect on delivery of services.

By Jack Stapleton Jr. ~ Southeast Missourian

JEFFERSON CITY. Mo. -- It becomes extremely difficult for the public and those seeking public office to overcome widely held beliefs on the subject of state finances.

This is expected, particularly when there is little or no understanding of previous revenue commitments, the nature of revenue gains and losses, and the systems in place to get taxes from constituents.

One example is the oft-stated observation that Missouri is a "low-tax state," a remark that had its origin even before the tax-limiting Hancock Amendment. The truth is Missouri's tax structure for state and local governments is influenced by citizens' distaste for the property tax. Missouri is not a low-tax state when it comes to levels for income and sales taxes.

These tax-revenue sources are the primary source of state revenue -- the property tax provides mainly local revenue. Missouri relies heavily on individual income tax to finance programs through the state's General Revenue Fund, which is a bellwether on the state's ability to fund existing and/or expanded service programs.

In 1993 the state enacted a significant hike in both the individual and corporate income-tax levies, limiting the deductibility of federal income taxes paid. The limitations are $5,000 in federal income tax deductibility for an individual and $10,000 for a couple. These amounts are fixed, not indexed, giving Missouri a tax rate of 6 percent for adjusted taxable income above $9,000; the change made all taxable income taxable at this figure after the U.S. deduction limit is met.

While this change produced significant revenue for Jefferson City when enacted, for higher income Missouri taxpayers it also "de-linked" state and federal tax systems. Before, a federal tax cut would increase revenue in Missouri since a lower federal liability meant a lower deduction. With the new system, federal tax reductions will serve to impact state liability only at lower income levels.

Sales tax

Yet another popular belief is that all of Missouri's sales tax collections go to the state for general allocation. The facts are this levy, the second-largest income source for the General Revenue Fund, has generally been the least objectionable tax to Missourians, while the property tax is very unpopular.

Sales taxes tend to be lower in rural areas, and higher in more populated ones. It is not unusual for a citizen in a moderately to heavily populated area to pay total taxes of 6.5 percent to 7.5 percent. However, only 4.225 percent of this sales tax collection goes into the state treasury, and only 3 percent goes to the General Assembly Fund.

The 4.225 percent is divided into four major funds: State General Revenue Fund: 3 percent; Proposition C for Schools: 1 percent; Conservation: 0.125 percent; and Parks and Soils: 0.1 percent.

To illustrate this predetermined division and allocation, let's examine Jefferson City's latest revenue totals for the month ending Sept. 30, which saw a monthly 7.59 increase in sales and use taxes while reporting a 2.07 percent decline in individual income tax collections and a 6.42 percent loss in corporate income tax payments. The sales tax increase of $9.7 million translates into a gain of $291,111 for the General Revenue Fund, while the decline of 2.07 percent in individual tax collections created a loss of $8,256,749 and a loss of $4,224,089 in corporate income tax payments. What appeared to be leveling out of tax collections turned out to be a $12.1 million loss in the three largest-yielding revenue categories for September's revenue totals.

The Conservation and Parks and Soils sales taxes cannot be used for general state expenditures. Half the Proposition C sales tax, approved by voters several years ago, goes to a fund distributed on a per-pupil basis, while the other half goes to school districts to reduce property taxes in the district.

In a state such as Missouri with below-average property taxes, Jefferson City has ceded a major part of its state sales tax authority to reduce local taxes. While school districts may petition voters to waive the property tax rollback from Proposition C, if there is no rollback, these funds are used to reduce local property taxes.

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