St. Louis Post-Dispatch: Effort to kill Missouri income tax has begun in earnest
media mentionSeptember 26, 2011
by Virginia Young
JEFFERSON CITY • Wrestling with your state income tax return? Missouri legislators are weighing a plan that would do away with that chore.
But before you celebrate, be aware that it’s not a tax cut. While state individual and corporate income taxes would be eliminated, the lost revenue would be replaced with a higher sales tax on everything you buy.
And that means everything — groceries, rent, new homes, doctor visits, child care, prescription drugs, private K-12 schooling and a host of other items not currently taxed.
It is a seemingly simple concept with vast implications. And it is being taken seriously in Capitol corridors this year largely because of one man: Rex Sinquefield.
Sinquefield, who made a fortune in the investment business in California, returned to his native St. Louis four years ago and began pouring his energy and money into politics. He founded a free-market think tank, hired a corps of lobbyists and became the state’s top political donor.
Convinced that income taxes retard economic growth, he wants to transform the state’s tax structure. If lawmakers balk, he may finance an initiative petition drive to get the so-called “FairTax” plan on the statewide ballot.
“If we don’t get what we really want, at some point that would be the option we have to consider,” Sinquefield said in a recent meeting with Post-Dispatch editorial writers and reporters.
It’s no idle threat: Sinquefield has already put $1 million into a petition drive to repeal the St. Louis and Kansas City municipal earnings taxes.
The prospect of wiping out state government’s largest source of revenue has turned the Capitol topsy-turvy. No one knows what the new sales tax rate would be. Estimates vary widely, from 6 percent to nearly 11 percent, not including local taxes.
Some legislators are wary.
“You have to replace a really significant amount of money,” said House Ways and Means Committee Chairman Mike Sutherland, R-Warrenton. “I’m not opposed to getting rid of the income tax and replacing it with another tax if we know all the answers to what we’re getting ourselves into.”
national debate
Nationally, the idea of replacing the federal income tax with consumption taxes has been percolating for a decade. The movement was chronicled in a bestselling book, “The FairTax Book,” co-written by a talk show host and a congressman from Georgia.
In a breezy style, the book argues that the complicated federal income tax code discourages work and encourages tax evasion. The authors propose replacing all federal income and payroll taxes with a sales tax on new goods and services. All households would receive a subsidy to cover sales taxes on necessities.
The concept galvanized anti-tax groups, who adapted it to state governments.
In Missouri, FairTax bills have been filed for at least six years but drew little attention until last year, when the House, on a 90-65 vote, passed a resolution putting the plan on the ballot. That measure died in the Senate.
But this year, after Sinquefield made a personal pitch at a Republican senators’ retreat, GOP leaders moved the issue up on their agenda. Now, it is headed for floor debate, possibly this week.
Sinquefield has given millions of dollars to political candidates and causes, including thousands to key lawmakers who control floor debate: House Majority Leader Steve Tilley, R-Perryville ($100,000 last February) and Senate Majority Leader Kevin Engler, R-Farmington ($25,000 last November).
Rep. Jeanette Mott Oxford, D-St. Louis and an opponent of the plan, said Sinquefield’s generosity “probably purchases some floor time for debate.”
Engler bristled at that allegation. He said debating the proposal would help iron out kinks in the tax plan so that if it eventually went on the ballot, it would be more workable.
“We need to vet it,” Engler said. “If you just put it on an initiative petition, nobody’s going to force them to vet it. My idea is, roll it out, see what gets shot down.”
Rep. Chris Kelly, D-Columbia, a co-sponsor of the plan, said it wasn’t just Sinquefield’s prominence as a political donor but his success as a businessman that had moved the FairTax into the spotlight.
“His participation changed it from a screwball right-wing issue to possibly a serious question of public policy,” Kelly said. “Nobody thinks Rex is stupid or lazy.”
Sinquefield is confident the tax overhaul would produce jobs. He cites his own experience: Dimensional Fund Advisors, the investment company he co-founded in 1981, moved to Texas instead of Missouri because Texas had no income tax.
Texas is one of nine states without income taxes. The others are: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington and Wyoming.
Missouri lags behind those states in production of goods and services, former Rep. Ed Robb, a retired University of Missouri-Columbia economist, told a Senate committee last month.
Missouri’s growth is about half the national rate and about 40 percent of the rate of states without income taxes, he said.
Some of the states without income taxes benefit from special revenue sources, such as oil severance and mining taxes or tourism and gambling. Even so, Robb contends that their lack of income taxes is a key factor in their growth.
He noted that in 1993, Missouri raised its corporate income tax to 6.25 percent as part of a school funding package. Since then, Missouri’s share of multistate corporations’ profits has declined from 4.5 percent to 2.6 percent in 2006, the last year for which information is available.
“When we increased their taxes, they decided they’d be better off investing in other states,” Robb said.
Others touting the tax overhaul included Joe Haslag, a University of Missouri-Columbia economist who moonlights for Sinquefield’s think tank, and supply-side side economist Arthur Laffer, who taught Sinquefield at the University of Chicago.
Laffer now lives in Tennessee, which he chose because it lacked an income tax.
“It’s really basic economics,” said Laffer, who advised former President Ronald Reagan. “You want a tax structure that does the least damage to your state. I mean, all taxes are bad.”
losing out
Opponents say the FairTax proposal would be bad for Missouri. They say losers would include:
• Working-class families, who spend a higher percentage of their income on goods and services.
• Businesses near the state’s borders, which would lose sales to states with lower tax rates.
• Parents of private and parochial K-12 students, who would owe a tax on top of tuition payments.
• Groups such as historic preservationists that rely on income tax credits. If the income tax disappears, there would no longer be a market for selling tax credits.
To understand the scope of the change, consider that Missouri collects about $5 billion from the individual income tax. Corporate income taxes and other business taxes targeted for repeal produce an additional $450 million.
In addition to replacing that revenue, the new sales tax would have to generate at least $2 billion dollars to pay for the subsidy every family would receive to defray sales taxes on necessities.
So how high would the new sales tax go?
Missouri currently imposes a sales tax of 4.225 percent on retail sales. Of that, a 3 percent levy goes to the general fund and the rest goes to education, conservation and parks. Local sales taxes come on top of the state levy and average 3.5 to 4 percent, though they would probably be lowered to reflect the broader base if the FairTax passed.
The FairTax plan currently calls for a new state tax rate of 5.1 percent. But proponents concede that they relied on incorrect census information to arrive at that figure, and they say they plan to change it after more research, probably to something close to 6.2 percent.
However, the Washington-based Institute on Taxation and Economic Policy released a detailed study that concluded the rate would need to be about 11.2 percent.
Asked about that figure, Sinquefield said: “I have no idea where they get that number or what kind of drugs they’re taking. And you can quote me on that.”
The plan’s sponsor, Sen. Chuck Purgason, said he wouldn’t pursue the plan if the rate climbed too high.
“If it gets out of the sixes, it’s DOA,” said Purgason, R-Caulfield.
His proposal, a constitutional amendment that would be placed on the November ballot, would set up a commission to review the new tax rate. If it didn’t produce enough money, lawmakers could adjust it.
One reason it’s hard to calculate the rate is because no state taxes consumption as broadly as Sinquefield is proposing.
Currently, Missouri has 132 sales tax exemptions. They run the gamut from feed for livestock to textbooks for college students. Services also are exempt, including those provided by doctors, accountants, housekeepers, nursing homes, lawyers and funeral homes.
All would be taxed under the FairTax resolution.
“You can’t take anything out,” Robb said. “If you take anything out, you have to raise the rate.”
The only exceptions would be business-to-business purchases, used goods and college tuition.
Former budget director and lobbyist Jim Moody, who testified against the plan, said that given its breadth, “This is kind of the womb-to-the-tomb tax.”
The Missouri Catholic Conference has weighed in against the plan, saying it would disproportionately burden the poor. With little money to save, low-income families would be unlikely to benefit from the new tax break on unearned income such as interest, dividends and capital gains.
Every household in the state would get a monthly check, based on the number of people in the family, to cover taxes on spending up to the poverty level.
For example, the federal poverty level for a family of four was $22,050 last year, so if the state sales tax was 6 percent, such a family would receive a subsidy of $1,323 a year.
Some critics say the proposed subsidy wouldn’t be enough to cover taxes on necessities such as rent, utilities, medicine, motor fuel and child care.
Engler said the Senate was exploring an expanded subsidy that would give people making up to twice the poverty level a card that would exempt them from sales taxes.
Also under consideration: exempting private and parochial school tuition from the new sales tax. The Catholic Conference has called that proposed tax discriminatory.
Sinquefield’s allies say he understands the struggles of the poor. As a child, he spent six years in an orphanage when his widowed mother couldn’t afford to care for him and his brother.
In the Post-Dispatch conference room, where he slid off his shoes and chatted for over an hour, Sinquefield said the poor would be better off under his plan because “up to about the poverty level, the poor will pay neither a sales tax nor an income tax.”
He cautioned that legislators shouldn’t turn the plan into a “Christmas tree” by exempting various products and services. “Rather than exempting food or medicine to help the poor, just exempt the poor,” he said.
As for interest groups that would lose their lucrative tax credits, Sinquefield said that he supported some of those programs, such as historic preservation, but that they should get direct subsidies instead of tax breaks. “It’s much healthier to do it out in the sunshine and get rid of the tax credit,” he said.
He said his “fantasy” was that Missouri would ‘start a wildfire” that would spread to other states and eventually, lead to elimination of the federal income tax.