Analysis: Missouri tax policy dates to Depression

JEFFERSON CITY, Mo. -- The U.S. was in the throes of the Great Depression when Missouri legislators decided to impose a 4 percent tax on personal income over $9,000 as a means of funding state government.

That decision has stood for decades, even as it has become increasingly outdated.

Although Missouri raised its top tax rate to 6 percent in the early 1970s, the top tax bracket has remained fixed at its original Depression-era threshold.

Yet a dollar today -- or $9,000 -- doesn't carry anywhere near the same buying power that it did when the tax brackets were set in 1931. In fact, Missouri's heftiest income tax rates -- once reserved for the well-to-do -- now hit people living in poverty.

"In a word, I would describe them as archaic," said state Rep. Paul Curtman, R-Pacific, who wants to index the tax brackets to the annual inflation rate.

The quest to change Missouri's tax brackets has support from both conservative and liberal groups but has remained difficult to accomplish because of the eye-popping cost of catching up with history.

Had Missouri's tax brackets kept pace with inflation, today's top tax rate wouldn't kick in until individuals earned more than $138,283 annually.

Curtman sponsored legislation earlier this year that would have applied the top tax bracket to incomes over $135,900. The bill never made it to the House floor for debate. The reason: it was estimated to reduce taxes by nearly $2.5 billion annually -- eliminating about 30 percent of the state's general revenue.

In 2014, Curtman said he plans a more palatable measure that won't attempt to make up for 80 years of inflation in one swoop. His new legislation would keep the $9,000 top tax bracket but start adjusting it annually for inflation.

Almost half the states already adjust their tax brackets for inflation, according to the Tax Foundation, a Washington-based not-for-profit group.

But only Alabama, Georgia and Oklahoma set their top tax brackets lower than Missouri. Alabama has the lowest threshold -- imposing a 5 percent tax on income over $3,000. Seven other states have flat income taxes, meaning all people pay the same rate regardless of income.

Missouri's tax bracket is particularly complex. A 1.5 percent tax is applied to income of less than $1,000. Then there are eight more incrementally increasing tax rates for incomes between $1,000 and $9,000.

Relatively few people may have earned more than $9,000 in 1931. But most Missourians now surpass that, even when accounting for deductions and other offsets allowed on tax forms. Of the 4.14 million taxpayers who filed returns for 2011, 2.29 million paid the top tax rate on income over $9,000, according to figures from the Missouri Department of Revenue.

"We think the thresholds, in general, should be raised," said Jay Hardenbrook, the public policy director for the Missouri Budget Project, a St. Louis-based not-for-profit group that analyzes fiscal issues with a special emphasis on how they affect the poor.

But Hardenbrook added: "While we support increasing the brackets, we don't support basically undercutting the entire state budget."

The Missouri Budget Project wants to offset the revenue lost from a tax-bracket adjustment by generating additional revenue elsewhere, such as by eliminating a state income tax deduction for the amount of federal taxes people pay.

Grow Missouri, a political action committee financed by retired investment firm executive Rex Sinquefield, has filed a proposed initiative for the 2014 ballot that would simplify and shift up the tax brackets while reducing the tax rate.

Under its proposed constitutional amendment, a 3 percent tax would be levied on income below $15,000 for individuals or $30,000 for couples. A tax of 4.9 percent would be levied on all income above those thresholds.

"Missouri has a very outdated, convoluted tax table currently," said Grow Missouri treasurer Aaron Willard. "Going to two instead of 10 (brackets) is just more simplified. It's much easier for people to look at and understand."

Willard estimates that the proposed income tax cut could range from several hundred million dollars to more than $1 billion annually.

The proposal would allow legislators to raise the state sales tax to compensate for the lost income tax revenue. But if lawmakers don't do so, the result could be less revenue available for public schools, prisons and other state services.

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David A. Lieb has covered state government and politics for The Associated Press since 1995. Follow him at http://twitter.com/DavidALieb