Patrick Tuohey at the Missouri Record has generously agreed to publish a piece I wrote on Rex Sinquefield and his political agenda in Missouri. The piece should come out tomorrow, but here is a selection of excerpts from the Show-Me Institute Quarterly clarifying Sinquefield’s advocacy on taxation. The excerpts are taken from the Fall 2008, Fall 2009, and the Winter 2010 issues of the Show-Me Quarterly.
Missouri is chronically below average for economic development and growth. During the past 10 years, employment has grown 8.8 percent nationally, while Missouri has boosted jobs by a barely perceptible 0.23 percent. In their study for the American Legislative Exchange Council, titled “Rich States, Poor States,” Laffer and Moore offer one explanation for the state’s poor performance: Missouri’s personal income tax rates. The highest rate of 7 percent — which includes the state’s top marginal rate of 6 percent, plus a 1-percent earnings tax imposed in Kansas City and Saint Louis — places the Show-Me State at 32nd in the nation.
We side with economists who say that an income tax is a huge drag on growth in two ways: First, an income tax lowers the net pay of workers, providing them with less of an incentive to work. The flip side of this argument is that Missouri workers are likely to demand higher pay in order to offset the higher after-tax income in other states. Second, the income tax is inherently unwise, because it’s relatively narrow in scope and cannot be avoided except by leaving the state. This is hardly the type of tax that makes sense in the face of cutthroat competition among states. Missouri needs business and job creation. We’re also impressed by another set of significant economic numbers. States with no income taxes have the lowest overall tax burdens, according to data compiled by the Tax Foundation. Indeed, the correlation is virtually one to one.
We show that the state’s economic growth has been sluggish by national standards, but that the nine states without an income tax have added more than twice as many jobs as the national average. Not all of this extra growth can be attributed to differing tax systems, but some of it certainly stems from the fact that the lack of an income tax lowers business costs. States without an income tax also have lower overall rates of taxation; the eight states with the lowest taxation rates in the country are eight of the nine states with no income tax. Multiple studies have shown that lower levels of taxation also boost economic growth, so implementing a sales tax to replace the income tax could boost growth in more than one way.
It’s true that a sales tax can be regressive, which is why it’s important to exempt low-income families from paying such increased taxes. If Missouri were to eliminate the income tax in favor of a slightly higher and more comprehensive sales tax, we could eliminate the penalty that the state’s tax policy imposes on business investment, and instead spur economic growth while simultaneously providing a more stable source of revenue for essential government functions.
n 2007, Missouri’s sales tax generated nearly $2 billion. To replace the income tax fully, the sales tax would have to produce another $4.9 billion, according to Joseph Haslag, executive vice president of the Show-Me Institute. (I would like to point out that because repeal of the income tax would stimulate growth, ultimately, a dollar-for-dollar increase in the sales tax won’t be necessary. But I’m willing to adopt a revenue-neutral approach for argument’s sake.) However, Missouri lawmakers over the years have voted to exempt more than 140 other items from the sales tax, according to research conducted for the Show-Me Institute. In addition, Missouri does not tax consumer services. If Missouri included in the sales tax all products and services purchased by individuals — which would exclude business-to-business transactions and capital acquisitions by businesses — a general sales tax rate of about 5.7 percent would suffice, according to Haslag’s estimates.