Missourians for Tax Justice OPPOSED
Senate Bill 27 -- Flat Income Tax Proposal

September 1, 2003 Update

This bill DID NOT PASS in the 2003 session. However, it seems certain that Sen. Gibbons will continue to pursue some version of this FLAT INCOME TAX legislation. Watch for it to reappear in the 2004 legislative session. The analysis of SB 27 (presented below) by the Institute on Taxation and Economic Policy shows who benefits from a flat income tax structure. That wealthier taxpayers would reap the "tax cut benefits" would be true in any flat tax proposal.


Update April 14, 2003

Senate Committee Substitute for Senate Bill 27, sponsored by Sen. Mike Gibbons (Majority Leader of the Missouri Senate), was approved by the Senate Ways and Means Committee on April 3, and reported in to the full Senate the same day.

This action was done quietly, not at a regular meeting time of the committee, and is a surprise since the bill was passed over for committee action at a regular executive session of the committee on March 11.

The committee added a provision to tax out-of-state gambling winnings, and made it much easier to continue to hand out tax credits. The bill has a new fiscal note that no longer claims a revenue increase for Fiscal Year 2004. It is said this bill may serve as a vehicle in the Senate for tacking on other tax increase proposals.

At the hearing on the bill in February, Missourians for Tax Justice testified against the bill. The only witness for the bill, other than Sen. Gibbons (the sponsor), was Ed Robb, director of the Research Center at U-MO, Columbia. Dr. Robb prepared the material used for the original bill's "official" fiscal note.

The Institute on Taxation and Economic Policy (ITEP) in Washington, D. C., which assists citizen tax reform groups in many states, prepared an Analysis of Senate Bill 27 for MTJ. The ITEP report gives the facts about SB 27.

MTJ sees this as a tax proposal that would insulate high-income taxpayers from having to pay a more fair share. Its tax reductions are highly regressive. The ITEP chart makes it crystal clear who would benefit from SB 27's provisions.

Another key finding of this Analysis is that under SB 27's provisions, Missouri would lose AT LEAST 720 MILLION DOLLARS IN REVENUE. This is clearly not in the interest of our citizens.

The bill does have one commendable provision: It eliminates the federal income tax deduction on state tax returns, and thus closes a serious loophole. Missouri is one of only 9 states that still allows any deduction for federal income taxes paid. Closing this loophole that primarily benefits high-income taxpayers would raise much needed revenue, and at the same time increase the fairness of our tax system.

SCS for SB 27's "official fiscal note" states that the total estimated net effect on the state's General Revenue Fund is: +$6.6 million to UNKNOWN for FY2004. For FY2005 and 2006, it estimates a gain of $93 million to UNKNOWN.

The fiscal note for SCS SB27 predicts that tax revenues would increase by $67.6 million due to the change to the flat tax. The Institute on Taxation and Economic Policy has carefully reviewed the fiscal note for the original bill, and finds that it is simply erroneous. Instead of any increase in revenue, the flat tax provisions would result in a huge loss of revenue.

It should also be noted that Sen. Gibbons stated at the Feb. 18 hearing on his bill that he intends to eliminate all corporate income tax and add this provisions to SB 27. That would add even more to the state's loss of revenue with SB 27.

This is a dangerous bill.  It would give a big unfair tax cut to the wealthiest taxpayers and drastically reduce the state's revenue at a time when that's the last thing Missourians need.

CONTACTS TO EVERY SENATOR, & to Gov. Holden, asking them to oppose this bill are needed.


Following is the APRIL 25, 2003 ITEP Report on Senate Bill 27:

The Impact of Imposing a "Flat Tax" on Missouri Personal Income
April 25, 2003

The Missouri personal income tax currently applies a graduated rate structure with tax rates ranging from 1.5 percent to 6 percent of income. This rate structure is applied to a tax base that starts with federal adjusted gross income, but allows a series of special deductions and exemptions that allow some Missourians to reduce their taxable income. One proposal for simplifying the Missouri income tax, Senate Bill 27, would eliminate almost all exemptions and deductions and conform more closely to federal adjusted gross income, and would apply a flat rate of 4 percent to all Missouri taxable income. This analysis estimates the distributional impact of this proposal.

Senate Bill 27 would eliminate a host of Missouri tax exemptions, including:
*  The state's deduction for federal income taxes paid, which is currently capped at $5,000 per taxpayer.
*  The exclusion for pension benefits, currently capped at $6,000.
*  All itemized deductions.

The bill would also replace the current standard deduction and personal exemption with a single deduction of $10,000 for single taxpayers, $15,000 for heads of household and $20,000 for married couples. The following chart shows the distributional impact of these provisions.

Impact of SB 27 "Flat Tax" on Missouri Personal Income Tax Burdens By Income Level
All Missouri Taxpayers, 2000

 2002 Income Group

 Lowest 20%

Second 20%

 Middle 20%

Fourth 20%

 Next 15%

 Next 4%
  

Top 1%

ADDENDUM
Total Tax Change
2000




 

- $720,000,000

 Income Range

 Less than $14,000

 $14,000- $24,000

 $24,000 - $40,000

 $40,000- $63,000

 $63,000 -$116,000

$116,000- $276,000

 $276,000 - or more

 Average Income in Group

------------------

STATE TAX CHANGE ONLY

$8,400

  

$18,700

 

$31,500

$50,400

$82,800

$164,700

$792,200

 Tax Change as % of Income

 -0.1%

-.2%

-.02%

-.5%

-.4%

-.7%

-1.4%

 $ Average Tax Change

 - $9

- $30

- $74

- $233

- $363

- $1,165

- $10,992

% of Total Tax Cut

 0.6%

2.1%

5.3%

16.6%

19.4%

16.7%

39.2%

SOURCE: Institute on Taxation and Economic Policy Microsimulation Tax Model, January 2003

The analysis shows that:
 *  The largest benefits from this proposal would accrue to the wealthiest Missourians, both in absolute dollar amounts and as a share of income. The wealthiest 1 percent of Missourians--those earning over $276,000 in 2000--would realize an average state tax cut of almost $11,000 from this proposal.

*   The wealthiest 1 percent would collectively realize 39 percent of the benefits from this proposal.

*   The lowest-income Missourians-those earning less than $14,000 in 2000-would receive an average tax cut of $9 from the proposal, and would collectively receive just 0.6% of the benefits from the proposal.

   This proposal would also have a substantial impact on the federal income taxes paid by Missourians. This is because Missouri taxpayers who itemize their federal income tax returns are allowed to write off their state income taxes. Any cut in state income taxes that affects itemizers will therefore reduce the amount of itemized deductions Missourians can claim on their federal return-and will increase the overall federal tax burden on Missourians. ITEP estimates that this "federal offset" effect would increase federal taxes paid by Missourians by about $162 million if this proposal were implemented in 2000--meaning that roughly 20 percent of the tax cuts under this proposal would never be realized by Missourians, but would be collected directly by the federal government in the form of higher federal income taxes for Missourians. This effect is especially pronounced for wealthier Missourians who are more likely to itemize their federal income taxes and who pay at higher marginal tax rates. For the wealthiest 1 percent of Missouri taxpayers, more than 38 percent of the Missouri tax cuts from this proposal would be immediately offset by federal income tax hikes.

###


About ITEP: ITEP is one of the leading research and education organizations in the country working on government taxation and spending policy. Since its founding in 1980, ITEP's work has played a key role in educating the public and informing federal and state tax policy. ITEP's website is http://www.itepnet.org

The analysis presented here was conducted using the ITEP microsimulation tax model. Since 1996 ITEP has used this model to conduct research on federal, state, and local tax systems. A microsimulation model uses a large sample of tax returns and other data that is extrapolated to the year being analyzed. This is the type of tax model used by the U.S. Treasury Department, the Congressional Joint Committee on Taxation, the Congressional Budget Office, and many state revenue departments. A properly constructed microsimulation model can provide accurate estimates of revenue yield and tax incidence by income group.

ITEP's microsimulation model relies on one of the largest databases of tax returns and supplementary data in existence, encompassing close to 750,000 records. Included in the sample are federal tax returns, with statistically valid samples from every state and the District of Columbia. A sampling of records from the U.S. Decennial Census five percent sample (which contains a random sample of five percent of all census forms received by the Census Bureau) are also included, and statistically matched with the tax return records. Other data sets are used to impute detailed expenditures for each record and other information. The data on the records is extrapolated to subsequent years using federal tax micro and tabular data, Census Bureau Current Population Survey micro and tabular data, and government and other widely respected macro data sources.(A complete description and methodology for the ITEP model is available on request.)
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