Missouri faces budget crunch as capital gains tax cut hits harder than expected

“The governor has been pretty transparent and pretty vocal that this is going to be a difficult budget year,” Haug said.

Gov. Mike Kehoe is scheduled to deliver his budget proposals on Jan. 13.

When lawmakers voted on the bill exempting profits from the sale of stocks and other assets from Missouri income tax, the official estimate put the revenue loss at about $160 million in the current fiscal year, with ongoing revenue losses at $111 million.

The state is now expecting a revenue loss in the current fiscal year of about $500 million from the cut, with an ongoing revenue loss of $360 million annually, Haug said.

That is close to the approximately $600 million estimate for the loss from the left-leaning Institute on Taxation and Economic Policy and reported by The Independent — and disputed by the state revenue department — weeks before the final vote in May.

During the most recent complete fiscal year, Missouri collected $13.4 billion in general revenue.

Through Tuesday, tax receipts for the year have grown 3.5%, enough to generate about $350 million in unanticipated revenue if continued through June 30 The capital gains tax cut, and to a smaller degree state tax impacts of federal changes, will help push the trend line into negative territory, with a contraction of 2.1% and total revenue of $13.15 billion.

“What we expect to happen is that most of the reduction from capital gains will occur in that February to April period when people start filing their returns,” Haug said.

The state does have a cushion to absorb the loss of revenue.

For several years, Missouri has enjoyed historically large reserves of surplus cash. The surplus peaked at nearly $8 billion in June 2023. Large sums have been set aside for improvements to Interstates 70 and 44, a major expansion of the Capitol Building and construction projects on college campuses and elsewhere.

The state employee pension fund received a one-time injection of $500 million and state employees have seen pay raises of as much as 35% since the start of 2021.

And lawmakers have been able to earmark hundreds of millions for pet projects and programs, despite vetoes by Kehoe and his predecessor, Gov. Mike Parson, that cut many of the expenditures.

For the past three years, appropriations for ongoing programs have exceeded current revenue, with the shortfall coming from the surplus.

“We’ve sort of gotten a little out of what on ongoing expenditures versus ongoing revenues,” Haug said. “We need to get that back under control.”

Kehoe has said he will make eliminating the state income tax, which accounts for about 65% of general revenue, his top goal for 2026.

The budget will be “challenging,” Kehoe said In the news release reporting the new revenue estimate

“Spending, not revenues, is the problem facing state government,” Kehoe said.

Republican budget leaders from the House and Senate, quoted in the news release, echoed Kehoe. Senate Appropriations Committee Chairman Rusty Black of Chillicothe said he will “develop a fiscally responsible budget,” while House Budget Committee Chairman Dirk Deaton of Noel said his goal is to “deliver a sustainable budget.”

The top Democrat on the House Budget Committee, state Rep. Betsy Fogle of Springfield, said the state has problems that require attention — and money — and the issue is insufficient revenue, not overspending.

Democrats warned that the capital gains cut was being low-balled but had no power to stop it, Fogle said. Being correct doesn’t help fund services, she said.

“What helps me is making sure that my constituents have a strong social safety net, have access to good public schools and have a state government that is more focused on making proper investments in the next generation and less focused on winning a primary election,” Fogle said.

Issues that require immediate attention, Fogle said, include the growing number of people languishing in jail while they wait for state mental health evaluations and treatment, which has doubled in two years to nearly 500, and federal program changes that increase state costs for Medicaid and other benefits.

Lawmakers must also deal with department budget requests that have identified more than $1 billion in new costs to continue current programs.

“Very few people in the General Assembly have been at the table when we’ve had to make drastic cuts,” Fogle said. “It’s very important that we do so in a thoughtful way that protects the core vital services of our departments.”

It would be irresponsible to eliminate the income tax, Fogle said.

“I cannot believe we are having a good faith conversation about the elimination of the income tax and blowing a $9 billion hole in our state budget,” Fogle said.

For the past three years, appropriations for ongoing programs have exceeded current revenue, with the shortfall coming from the surplus.

“We’ve sort of gotten a little out of what on ongoing expenditures versus ongoing revenues,” Haug said. “We need to get that back under control.”

The current budget, after Kehoe’s vetoes, projects spending $15.7 billion in general revenue, about $2.6 billion more than the new estimate anticipates in revenue.

Fogle said she is worried that the state will cut optional services for Medicaid recipients or reduce funding for higher education and public schools to align expenses with receipts.

Kehoe will include some surplus funds in his budget proposal, Haug said.

“One nice thing about the fund balance we do have is it does let us try to solve this problem over a couple of years, versus having to solve it all in one year,” Haug said. “And so I think what you’re going to see with our budget this year is the beginning of that process, sort of reining in some of the spending.”