'Let Voters Decide': Tax Reform in Missouri
A campaign in the great state of Missouri called Let Voters Decide seeks to abolish the state's income tax and replace the lost revenue by expanding the state's sales tax. Signatures are being collected to put the matter before voters on the November ballot. The new tax regime is the brainchild of retired investment banker Rex Sinquefield, who explained it in this 2009 essay. But the long knives are coming out against the idea.
On Jan. 26, The Kansas City Star posted an AP story reporting that Mr. Sinquefield had donated another $1.2 million to the campaign, his second such contribution. An earlier editorial in the paper had already expressed disapproval of the campaign. The editorial claims that Sinquefield's plan would "eliminate the tax source which brings in 65 percent of Missouri's revenue." Not only that, but "consumers would pay a 5.5 percent sales tax on food, which currently is exempt." Across the state from K.C., the editorial board of St. Louis Post-Dispatch observed:
Trouble is, even if you doubled the state sales tax rate to 8.45 percent (making the total sales tax in St. Louis city, for example, 13.461 cents), it still would leave Missouri more than $1.3 billion short of matching the $4.69 billion in individual and corporate taxes raised in fiscal 2010.
Unfortunately, one doesn't see any alternative tax reform plans amidst all the criticism of Sinquefield's plan. So here's one: rather than abolishing its income tax and expanding its sales tax, Missouri should abolish its sales tax and expand its income tax. This expansion would consist of a mandatory surtax on all earned income: wages and salaries. This surtax would come right off the top of one's paycheck, just like the payroll tax. With this reform, Missouri would have an assured stream of revenue throughout the entire year regardless of how much folks are spending in commerce.
And how big would this surtax be? In 2010, Missouri enterprises paid out $163 billion (see note) in wages and salaries, and the "state sales and use tax" produced revenue of $2.95 billion (page 4). So our surtax on earned income would produce as much revenue as the current sales tax with a rate of about 1.8 percent.
Because lower- and middle-income-earners save less and spend more of their income, this surtax would seem to be less "regressive" than a sales tax, especially Mr. Sinquefield's sales tax, which would be levied on food. And the only way a low-income Missourian would fare worse under this surtax than under the current sales tax of 4.225 percent is if he spent less than 43 percent of his earned income on things subject to the current sales tax. So with our surtax on earned income, lower-income-earners would get a tax cut. (Here's the progressive critique of the Sinquefield plan from Progress Missouri, and here are the analyses from Missourians for Fair Taxation.)
For years, progressive economists have bewailed the slowdown in demand. One might then consider the effect of abolishing the sales tax on commerce, especially retail sales. How could dropping the sales tax be anything but positive for sales? After all, Missouri regularly has sales tax holidays -- let's make it year-round.
One advantage of dropping the sales tax and expanding the income tax is the ability to get at what we'll call "free riders." Free riders are serious savers and investors, who therefore don't contribute much sales tax revenue. Then, when the free riders relocate -- for a new job, or to retire and start spending their money -- the state where they amassed their wealth is left without their revenue. A mandatory surtax on earned income fixes that.
Free riders illustrate another problem with sales taxes; they depend upon the individual choosing to do something -- i.e., engage in commerce. But in the Great Recession, folks are choosing to hang onto their money, and sales tax revenue is down.
With our nifty little surtax, Missouri could forget about sales tax revenue lost to trade on the internet and/or to other states, as the replacement for the sales tax would be paid regardless of whether residents buy locally, out-of-state, online, or at all. If all the states replaced their sales taxes with a more reasonable tax, such questions of lost revenue would no longer arise. So they'd have no need for a use tax, either.
But on March 28 in The Star, a benighted editorial supported taxing internet commerce. Did the editor consider the nightmare of an internet store complying with demands for sales taxes from potentially every tax jurisdiction in America? Leave the Net alone.
At least Missouri doesn't levy a sales tax on food -- not yet, anyway.
NOTE: The link for Missouri's total payroll ("$163 billion" above) takes one to the Regional Data webpage at the U.S. Department of Commerce. Open up the fourth entry, ANNUAL STATE PERSONAL INCOME AND EMPLOYMENT; click on the second item, Personal income and employment summary (SA04); and when you get the next webpage, specify "Missouri" and "2010" and click on Next Step. The next webpage holds the data, which is Line Code 35. The reason why my surtax doesn't key off total personal income (Line Code 10), which is $221 billion, is because it contains dividends and such, which have already been taxed.
Jon N. Hall is a programmer/analyst from Kansas City.