This article first appeared in the St. Louis Beacon, April 30, 2009 - On April 16, the Missouri House of Representatives passed HJR 36 . Dubbed the "Fair Taxation" bill by its sponsors, the legislation as it now stands is anything but fair to Missouri's taxpayers, particularly those in the middle-class and those less well off. HJR 36, if passed by the Senate, provides for a constitutional amendment that would replace the state corporate and individual income taxes with a vastly expanded sales tax.
The bill would go before the state's voters for their approval in the fall if it gets through the Legislature.
The proposed shift from the income tax to the sales tax would have a potentially devastating effect on the state's economy and would also make Missouri's tax structure less fair. If the changes in tax structure occur then the state's less well-to-do taxpayers would shoulder an increasing share of the state's tax burden and in all likelihood state services would have to be cut.
According to the nonpartisan Missouri Budget Project , HJR 36 would have to increase sales tax rates as well as broaden the tax base just to stay even with this year's spending. Currently, income taxes account for $5.8 billion or 73 percent of the state's total expenditures. This is the size of the hole that would need to be filled by sales taxes if the bill's provisions were to take effect.
To fill the gap, the state would need to hike sales tax rates and apply the tax to services that are currently untaxed in the state including medical care, nursing homes, child care and school tuition. The MBP estimates that even if the sales tax were applied to all services, it could still result in a significant revenue shortfall that would necessitate raising the rate from 3 percent to as high as 9 percent.
The figures quoted above are all based on this year's spending totals. Without the increases, state spending would have to be reduced by $1.5 billion, which would mean that state services would have to be cut by nearly 19 percent. Cuts of this magnitude would fall most heavily on vulnerable citizens of the state who are also the heaviest consumers of state services.
In addition, again according to the Missouri Budget Project, the burden of the tax would be borne by young households and senior citizens. In a recently issued report, the MBP calculates that a family consisting of two working parents and two children (including a pre-schooler) would see their average tax bill increase by $371 - just for child care.
If HJR 36 passes in its present form, Missouri seniors living in nursing homes would have to pay $1,226-$3,270 in new taxes. This is based on the average cost for nursing homes in the state.
Expanding the sales tax so that it includes all services would make the state's tax structure less fair to lower-income taxpayers, who spend a disproportionately large amount on consumption, particularly, on necessities such as food and housing. The sales tax is a consumption tax. As consumption is taxed more, low-income families see their individual tax burdens increase more than the higher-income families.
One provision of the bill says it is designed to be revenue neutral. This just means that a new sales tax rate has to make up losses in state revenue resulting from the bill. Thus, as pointed out earlier, even if the tax were applied to all services, significant shortfalls in revenue are projected at the current rate. Therefore the tax rate would have to be increased to at least 6.4 percent but could go as high as 9 percent. Again, while everyone who purchases goods and services in the state would be affected, the least well-off stand to lose the most.
The economic impact of raising sales tax rates and expanding tax coverage to include all services would have a dire affect on the state's economy. Given that the country is in the midst of a deep recession, the economic impact of passing HJR 36 could be catastrophic.
Increasing the sales tax would make purchases in Missouri more expensive, which would reduce consumer demand, particularly in the border areas of the state, where consumers can escape the tax by crossing a state line to shop. For example, the sales tax rate is 6.25 percent in Illinois, 6 percent in Arkansas and 5 percent in Iowa. These states would likely lure consumers from Missouri if HJR 36 passed.
In sum, HJR 36 is no reform. If passed, it would harm the state's taxpayers and businesses. It would lead to a less equitable tax structure and discourage commercial interests from investing in the state. In the long run, the bill would result in fewer jobs and a weaker economy.
Robert Cropf chairs the Department of Public Policy Studies at St. Louis University.