Is sound tax policy achieved by eliminating the corporate income tax?
Missouri proposed bill, Senate Bill 93, would eliminate the state corporate income tax. The business community has voiced strong support for the effort.
Senate Bill 93 would phase out the state’s corporate income tax by 2027 by reducing the state’s current 4% corporate income tax rate by one percentage point a year beginning in 2024. The tax would be eliminated in 2027. The change is estimated to cost about $765 million once the tax is completely repealed. This is the second major tax-cutting proposal in the last three months; in October the state enacted personal income tax reductions totaling about $760 million. The Associated Industries of Missouri and the Missouri Chamber of Commerce and Industry strongly support the passage of the phase-out. Both organizations assert that phasing out the corporate income tax will make Missouri more competitive.
Senate Bill 93 would also effectively eliminate Missouri's 4.48% financial institutions tax because state law requires that tax to be reduced by an amount proportional to any cut to the corporate income tax. According to the state, the financial institutions' tax raised about $54 million in tax revenue in fiscal year 2022.
RSM’s state tax policy experts weigh in on the Missouri proposal to phase out the corporate income tax.
David Brunori
Whether it passes or not, this bill will likely be the best state tax proposal of 2023. The corporate income tax simply does not work. I would ask proponents why we tax corporate income? Many will say it's because we need the money. But the tax raises very little money. The tax accounts for less than 1% of total Missouri revenue. Yet, it consumes an inordinate amount of administrative and compliance resources. Perhaps, you think that the tax is justified because corporations use public services. But Missouri is a single-sales factor state. The corporate tax under single sales apportionment is no benefits tax. Maybe you think the tax is necessary because it brings a measure of fairness to a decidedly regressive system. But there is ample evidence that much of the tax burden is born by labor in the form of lower wages and consumers through higher prices.
The tax does not work and honestly, it never will. It is difficult, indeed almost impossible, to tax mobile capital in a global economy. Many legislators want the revenue from taxing corporations but also want the investment and jobs created by those corporations. And we end up with a dizzying array of laws aimed at collecting more revenue (combined reporting, tax havens, rate hikes) and laws aimed at attracting businesses (incentives, single sales factor, etc.). Six states reduced corporate income taxes last year; more will do so in 2023. Two years ago, North Carolina enacted a law to phase out its tax. Missouri should do the same.
Mo Bell-Jacobs
I have concerns about the wholesale elimination of a major tax. The last few years almost every state has benefited from pandemic relief funds, a furious and almost never-ending “reopening” economy, and, from a tax revenue standpoint, inflation, although I do recognize that inflation cuts both ways. Why do I list those three? All of them can change, and quickly to boot. Federal pandemic relief funds have been committed and will have less of an impact as we look to FY24 and FY25. Consumer confidence has remained somewhat high, but again, that can turn on a dime. And regardless of your opinion on the causes and solutions for inflation, it does appear to be improving.
But how is Missouri now? The Tax Foundation’s 2023 State Business Tax Climate Index ranks them as 11th best in the nation, right outside the top 10. Their corporate tax rank? Three. And I’ll note they are 21st and 26th in individual and sales tax rankings, respectively. In fact, in the last ten years, the state has only once been ranked outside of the top 15, and not once outside the top five for a corporate tax ranking. The state is also ranked 42 for corporate income tax rate, with a below-average, and taxpayer-friendly, 4%.
What about the revenue impact? In FY22, the state brought in over $900,000,000 of corporate income and franchise tax, or somewhere in the 5%-7% range for all tax revenue. About the same is estimated in FY23 and FY24. That’s almost $1 billion – not a small amount of revenue and not easily made up from other sources like from the sales and use tax or individual income tax – even with both experiencing recent sustained growth. I will note that the bill’s long-term fiscal estimates of reduced revenue are closer to the $750,000,000 range. That’s not to say my colleague is wrong citing 1% - his estimate accounts for the tax’s impact on all state budget funds including federal distributions.
I also recognize that the corporate net income tax, generally, is expensive to administer and expensive for taxpayers to comply for a small percentage of tax revenue relative to all state tax revenue, but in all fairness, that’s more of an argument against the very foundation of the tax, not specifically the tax as imposed in Missouri. Missouri is already competitive with a low rate and a more fair tax base, and if the good people at Tax Foundation can be trusted (I trust them) already competitive, especially from a regional perspective. If now’s the time to eliminate state corporate income taxes, let’s consider that 1) the state economy turns quickly so it would be wise to minimize assumptions on replacing the tax and 2) aim to create a more fair tax system. Or perhaps the scheduled phase-out provides the state enough cover to extend the tax as dictated by economic forecasts and a dynamic economy.
