Report: Income inequality affects Missouri taxes

JEFFERSON CITY, Mo. -- A national increase in income inequality appears to be negatively affecting tax revenue in Missouri and other states, according to a new report from a credit-rating agency.

The report by Standard & Poor's notes that Missouri's average annual tax revenue growth has declined sharply over recent decades. From the 1950s through the 1970s, Missouri averaged more than 9 percent annual growth. But from 2000 to 2009, it averaged just 1.8 percent growth.

Over the past several decades, household incomes have risen significantly faster for the top 1 percent of earners nationwide than for median households -- a trend that economics refer to as the income gap, or income inequality.

The Standard & Poor's report examined the tax revenue in 10 states that rely heavily on income taxes, including Missouri, and 10 other states that depend more significantly on sales taxes for their revenue.

"The findings from our research indicate that tax revenue growth slows as income inequality rises, regardless of a state's tax structure," said the report, written by S&P credit analysis Gabriel Petek.

In Missouri's sales-tax dependent neighbor of Tennessee, for example, the average annual tax revenue growth has declined from 9 percent in the period of the 1950s through 1970s to 3.8 percent during 2000 through 2009.

Although Missouri had a sharper decline than Tennessee, the report found that the rise of income inequality generally had a stronger negative effect on the group of sales-tax-reliant states than the income-tax dependent states.

The report concludes that income inequality is an economic problem -- with financial implications for states -- and that states are unlikely to be able to fully offset it by changing their tax policies.

Some Missouri economists and budget officials said there are other factors besides the growth of income inequality that may be contributing to Missouri's slower tax revenue growth.

Most notably, Missouri has enacted a variety of tax cuts over the past 20 years -- enlarging individual income tax deductions, phasing out the corporate franchise tax, exempting food from state sales tax and creating dozens of income tax credits for businesses and industries.

Missouri's top individual income tax bracket has remained at $9,000 since the Great Depression era, meaning all income above that is taxed at 6 percent. A law enacted this year by the Republican-led Legislature could gradually reduce that tax rate, starting in 2017. There has been no movement among Republican legislators to charge a higher tax rate to those earning the most, as California has done.

"The fact that income increases past a certain amount are not taxed progressively would certainly be contributing to this" slowdown in state tax revenue as more income has shifted to the rich, said Tom Kruckemeyer, a former state economist who now works at the not-for-profit Missouri Budget Project.

State budget director Linda Luebbering said the level of income inequality is not something that state budget analysts and economists directly discuss when developing forecasts for state revenue, though they do look at trends in income and consumer purchasing.

Luebbering said Missouri has "seen a flattening of sales tax" revenue in recent years, which has contributed to a growing reliance on the individual income tax.

The affluent tend to save a greater share of their income or spend it on untaxed services, meaning states are unlikely to see much of an increase in sales tax collections based on financial gains among the wealthy, said Standard & Poor's.

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