A top business lobbying group is stepping up its opposition to a proposed constitutional amendment to replace the Missouri income tax with sales taxes, arguing Missouri is already an attractive place to do business.
The legislation that would enact one of Gov. Mike Kehoe’s top priorities has already passed the House and on Tuesday, won approval in the Senate Economic and Workforce Development Committee on a party-line vote.
Ray McCarty, executive director of Associated Industries of Missouri, said after the vote that only one of six changes the organization sought was included in the version approved Tuesday. That isn’t enough to change the organization’s opposition, which questions the premise of promoters that getting rid of the income tax would improve Missouri’s competitive position relative to other states.
Missouri has a lower cost of living, a lower corporate tax rate and saw more business creation in 2024 and 2025 than almost every state that has no income tax currently, an analysis prepared by McCarty’s organization states. And the current tax burden on business is lower, as a share of total state and local taxes, than every state without an income tax.
“We looked at all those things, and we compared them to the no tax states, and found we were already really competitive,” McCarty said in an interview with The Independent.
The version approved by a Senate committee Tuesday has several changes from the version that passed the House. It would give lawmakers five years to enact a tax scheme to replace the income tax, instead of three.
And it would allow local governments to decide how to offset new revenue from an expanded sales tax by lowering other taxes, such as personal property or earnings taxes, instead of imposing a fixed priority list for those reductions.
But the key elements remain unchanged.
It would enact automatic reductions in the top income tax rate for every $20 million of revenue that exceeds the amount collected during the base year. And after automatic rate reductions push the top rate below 1.4%, the income tax would end, with the goal of having no income tax by 2032.
The other provision that is unchanged from the House would allow lawmakers to enact tax “transactions involving any goods or services.” That would allow an expanded sales tax, for example, to cover labor for car repairs, accounting services for tax preparation and medical care.
The schedule for bringing the proposal to the full Senate is uncertain.
The longer window to enact replacement taxes will mean lawmakers aren’t rushed, said state Sen. Curtis Trent, a Republican from Springfield.
“That just gives the General Assembly more time to accomplish the reform and more time to make adjustments,” he said.
Missouri collected $9.2 billion in income taxes in the fiscal year that ended June 30, retaining about 85% of that amount after refunds. Revenue from the 3% general revenue sales tax was about $3.2 billion.
McCarty estimates the state needs $7.75 billion to replace the after-refunds revenue from income tax. The state is already covering a $2 billion deficit in next year’s budget from accumulated surplus funds that will be exhausted by June 30, 2027.
The revenue from any new taxes used to supplant the income tax won’t be known for certain until they take effect. McCarty said. Lawmakers will use estimates, but estimates can be wildly wrong, he said.
The estimated revenue impact for a capital gains tax cut bill last year pegged the loss to the state at $111 million annually. When the state estimated revenue for the upcoming fiscal year, the loss from the capital gains cut was pegged at about $500 million.
“If we’re 10% wrong with $7.75 billion, that’s $775 million,” McCarty said. “So that’s not a mistake you can just gloss over.”
Manufacturers want more protections in the proposal to preserve their current sales tax exemptions, McCarty said. They want provisions to protect them from paying sales tax on materials used to produce goods that would be subject to sales tax and a prohibition on new taxes that target business such as gross receipts or additional taxes on profits.
A gross receipts tax may be simpler but it is more difficult to explain to customers, McCarty said.
“The sales tax is better because you’re collecting it from customers, and it’s separately stated, and you can blame the government.,” he said. “The gross receipts tax is on you, and you have to raise your prices to compensate for it.”
The opposition of Associated Industries is in addition to the opposition from the Missouri Association of Realtors. The Realtors used the initiative petition process to add constitutional protections against sales taxes on real estate transactions and other transactions not currently taxed, spending $4.3 million in 2010 to protect real estate sales and $5.6 million later to expand those protections to services and other untaxed transactions.
“If we were willing to spend that much a decade ago,” Realtor lobbyist Jason Zamkus said after testifying on the bill in February, “we are certainly going to fight to protect it.”
To replace the revenue of the income tax without expanding the goods and services that are taxed would increase the state general revenue sales tax by up to 8.5%. That would push taxes at some retail locations to 20% or more when other state and local taxes are included.
To obtain $7.75 billion in new revenue from the current 3% general revenue sales tax, lawmakers would have to find about $225 billion worth of transactions to tax each year. The entire Missouri economic output is about $350 billion annually and about $100 billion is already subject to sale taxes.
The highest state rate that voters will accept, Trent said, is about 6%, which is close to the average of state sales taxes for surrounding states.
“You can’t really get any higher than that without the reform failing,” he said. “You have to be very concerned about the rates in other states, because you start to leak revenue across state lines if the states nearby are significantly lower than where Missouri is.”
The opposition of Associated Industries and the Realtors will not be a major factor in an election, Trent predicted.
“This is the kind of thing that the public wants,” Trent said, “and I’m pretty confident that even if there was no campaign, the public would want to see this happen.”
