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Missouri’s Tax Reform Would Increase Burden on Poor and Relieve the Wealthy

April 19, 2013
Taxes
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The newest revision of Missouri’s SB26 would raise taxes on the poorest 1 million taxpayers, while giving a tax cut of over $10,700 to the wealthiest 60,000 filers:

  • The top 1%, who earn $941100 a year, will pay 1.14% less of their income in taxes.
  • The bottom 20%, who earn $10,100 a year, will pay 0.30% more of their income in taxes.

Wealthy business owners stand to see significantly more tax cuts, thanks to a business income deduction, which would be implemented gradually, over 5 years. Those in that super-rich group, the 1%, with business income, would save an additional $11,503 in taxes were all changes implemented.

  • The top 1%, on average, would save $10,702 in taxes.
  • Non-business owners in the top 1% would save $4,146 in taxes.
  • Business owners in the top 1% would save $15,648 in taxes.

 

SB 26 Tax Reform Summarized

The bottom 20% of Missouri aside, the new bill does benefit all Missourians, with tax relief disproportionately weighted toward the wealthiest in the state. The sole progressive feature of the tax bill is an increased exemption for low-income Missourians.

In sum, the reforms are as follows. Most would be implemented gradually until Tax Year 2018:

  • The sales tax would rise from 4% to 4.6%, gradually, over 5 years.
  • Individuals earning less than $20,000 a year would see an increased exemption, of $2,000 more deducted from their tax bill.
  • The corporate income tax rate would fall from 6.25% to 5.5%, over 5 years.
  • Business owners could claim 50% of their business income in deductions.
  • The income tax would be trimmed from 6% to 5% over 5 years.

The income-tax cut is somewhat in-flux. At first, the top rate would be cut from 6% to 5.33% and then, were the Marketplace Fairness Act of 2013 to pass, that rate would drop an additional 0.33%, to 5%.

The sales tax explained

Why the disparity, in whom the tax bill would help more than others? As NerdWallet pointed out in a recent study of the average tax burden across the nation, lower income taxes disproportionately benefit the wealthy, and higher sales taxes disproportionately hurt the poor.

The sales tax doesn’t benefit lower-income tax-filers quite like it does the wealthy. It’s nominally flat but effectively regressive, hitting lower-income families the hardest, because the poor spend a greater portion of their income than the wealthy.

On each dollar, everyone is taxed the same. But, as a proportion of income, this tax takes more from the poor.

To explain, let’s back up for a moment. The poor, by and large, contribute a significantly higher proportion of their income to sales-taxable goods. In some states, those sales-taxable goods even include necessities like food and groceries – that’s the sales tax at its most regressive. In this sense, Missouri’s tax code is relatively progressive: groceries are exempt from a sales tax.

That said, a sales tax is regressive nevertheless simply because of how much low-income Missourians spend:

  • The bottom 20% of Missouri, under current rates, will spend 89% of their income on sales-taxable goods in 2013: $596 to the sales tax and $8,386 to the goods themselves.
  • The top 1% of Missouri, under current rates, will spend 14% of their income on sales-taxable goods in 2013: $8,470 to the sales tax and $119,193 to the goods themselves.

In a vacuum, the increase in sales tax is negligible, at $31 more for the bottom 20% of Missouri. A closer look at any income group’s finances, however, shows a tax reform’s impact more holistically, including that of the proposed changes in Missouri. A lower income tax will benefit the wealthiest in the state, while a higher sales tax will put more pressure on the poor.