New law makes Missouri corporate tax one of lowest in U.S.

JEFFERSON CITY, Mo. -- Thousands of Missouri businesses will receive tax cuts with the new year. But because of the way the new law is written, some corporations doing business in Missouri could end up paying more.

The give-and-take tax law enacted by former Gov. Eric Greitens just hours before his May 2018 resignation is to finally take effect Wednesday with the start of the 2020 tax year.

The law will cut Missouri's corporate income tax rate from 6.25% to 4%, making it one of the lowest rates in the nation. But another provision in the law will do away with an option for calculating corporate income that could result in higher Missouri tax bills for some multi-state businesses.

The two-prong overhaul to Missouri's corporate tax laws has made it difficult to project whether the state stands to gain or lose money, and if so, how much. Yet the state's largest business groups believe the change will be beneficial.

"Ultimately, I think what we could see is a bit of incentivizing companies to set up operations here in the state and bring employees into the state," said Matthew Panik, vice president of governmental affairs for the Missouri Chamber of Commerce and Industry. "Or, if they're already here, to of course increase their operations."

Forty-four states levy corporate income taxes, which typically account for a much smaller slice of state revenue than individual income and sales taxes. The lowest flat corporate tax rate is in North Carolina, at 2.5%.

When figuring corporate income taxes, Missouri currently allows businesses to choose among options. One approach calculates the percentage of total income attributable to in-state sales when figuring Missouri income tax. Another approach lets businesses average the percentage of their total sales, payroll and property attributable to Missouri when calculating the tax.

The three-part option can reduce Missouri income taxes for businesses selling products in Missouri but don't have physical stores or warehouses in the state. The new law will end that option and instead require all corporate income taxes to be based on Missouri sales, joining a majority of states already using that approach.

After the law was enacted, legislative research staff estimated it could result in anywhere from a net $4.4 million tax cut to a $4.9 million tax increase for the 2020 fiscal year, which ends July 1.

Projections diverge even further for the law's first full year of application. Legislative researchers estimated its impact could range from an $8.8 million net tax cut to a $9.7 million tax increase in fiscal year 2021. The not-for-profit Missouri Budget Project, which analyzes state financial issues with an eye toward their impact on low-income residents, estimated the new law could result in a net $28 million tax cut.

The Missouri Budget Project said the corporate tax changes build on a "decades-long trend of cutting taxes."

"It continues to erode the foundation and our ability to fund education, early ed, infrastructure, health care and all of the other services that families and communities rely on," said Traci Gleason, the Missouri Budget Project's vice president of external relations.

The Republican-led Legislature also passed changes to Missouri's individual income tax code in 2018. That law reduced the top individual income tax rate from 5.9% to 5.4% effective Jan. 1, 2019. But the effect of the tax rate cut was offset by another provision in the law that reduced the Missouri income tax deduction that can be claimed for taxes paid to the federal government.

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