Missouri Tax Reform 2023: Details & Analysis
Missouri has worked to improve its tax competitiveness significantly in recent years, but state lawmakers have always regarded tax reforms as ongoing, particularly in light of the growing tax competition across the country. House Bill 816, which recently passed the House and crossed over to the Senate, would build on past tax reforms and give Missouri one of the most competitive state tax codes in the country according to the State Business Tax Climate Index, a measure of the competitiveness of state tax structures.
House Bill 816 would reduce the top individual income tax rate from 4.95 percent to 4.5 percent in 2024. The bill would also reduce the corporate income tax rate to 2 percent in the same year, with revenue triggers that would phase out the tax entirely in two stages.
Individual Income Tax Changes
Missouri lawmakers first created a series of tax triggers in 2014 to lower individual income tax rates. In recent years, they have repeatedly accelerated those rate changes and extended their potential reach. In 2021, lawmakers enacted SB 153 which, among other changes, added two additional reductions to the revenue trigger mechanism established in 2014, and specified that the top rate would be reduced by 0.1 percent in 2024 without having to reach a revenue goal. In 2022, they acted again, passing SB 3 to expedite those triggers and eventually reduce the top rate to 4.5 percent. HB 816 goes further by reducing the rate to 4.5 percent in 2024 regardless of revenue, but it keeps in place the triggers for a future reduction of 0.15 percentage points and three additional triggered reductions of 0.1 percentage points each.
Compared to the country as a whole, Missouri’s income tax rates are below average, but regionally, it is tied with Illinois and has a higher top rate than four of its neighbors: Arkansas (4.9 percent), Kentucky (4.5 percent), Oklahoma (4.75 percent), and Tennessee (which has no income tax at all). A tax rate of 4.5 percent would bring Missouri’s rates below those of Oklahoma and Arkansas, tying Kentucky (although the Bluegrass State recently enacted a series of tax triggers that will reduce that rate further if certain revenue goals are met).
Corporate Income Tax Changes
On the corporate side, Missouri has already made important strides by eliminating its throwback rule, instating single sales factor apportionment, and reducing rates. By cutting the corporate income tax rate in half and setting up triggers for eventual elimination, HB 816 would continue this march towards greater tax competitiveness. If net corporate income tax revenue in FY 2025 exceeds the same revenue from FY 2024 by $50 million or more, then the two percent rate will drop to 1 percent. If net general revenues in the following year exceed the net general revenue from the reduction year by $250 million or more, then the tax will be eliminated.
The Show-Me State already has the second-lowest corporate income tax rate in the country at 4 percent, tied with Oklahoma and above North Carolina’s 2.5 percent rate. However, North Carolina is set to phase out its corporate income tax entirely by 2030, making the state one of three with neither a corporate income tax nor a gross receipts tax. With HB 816, Missouri would likely be the fourth—an enviable position in a time when businesses and residents are more mobile than ever before.
Missouri is well-positioned to make this change. The state saw strong revenues coming out of the pandemic, and that growth has continued, with collections in FY 2022 surpassing those of FY 2021 by over 14 percent. Corporate income taxes tend to bring in comparatively little for the state: in fiscal years 2019 and 2020, corporate income taxes accounted for only 1.8 and 1.9 percent of Missouri’s state and local tax collections, respectively. Corporate income taxes also tend to be far more volatile than other forms of taxation, so reliance on this revenue source can put states in a tough position in times of economic downturn.
While corporate income taxes do not make up the largest portion of businesses’ tax burden in Missouri (or any other state), reducing and eliminating such taxes help reduce overall tax burdens, giving businesses more flexibility to grow and make decisions that benefit the state’s economy.
Pro-Growth Tax Reforms Would Boost Missouri’s Attractiveness
The tax reforms in HB 816 would represent pro-growth change for Missouri. The state currently ranks 11th on the State Business Tax Climate Index. With the first stage of the proposed tax reforms in place (a corporate rate of 2 percent and an individual income tax rate of 4.5 percent), Missouri would rank 8th overall, breaking into the top 10.
Accelerating its current individual income tax triggers and setting up the corporate income tax for eventual elimination would increase Missouri’s attractiveness among states at a time when businesses are increasingly mobile and tax competition matters more than ever.
