As Missouri lawmakers face state budget proposals in the 2024 legislative session, they might want to consider what their staff had reported about the financial impact of tax cuts passed in prior years.
In 2023, the legislature approved tax reductions for government employee pensions and Social Security benefits. A year earlier, the legislature passed a measure providing reductions in the income tax rate when there was a substantial increase in tax collections.
Those two tax cuts likely were partially responsible for a subsequent decline in the growth of state tax collections. Although Gov. Mike Parson signed the pension and Social Security tax cut, he later cited the revenue loss from that bill for his veto of 201 items in the budget the legislature had passed.
Legislators should not have been surprised. Legislative staff had warned of significant losses to state general revenue from the two tax cuts. Those warnings came from the legislature’s Legislative Oversight Division which provides estimates termed “fiscal notes” as to the projected revenue impacts from measures before the legislature.
The division’s final fiscal note for the 2023 retirement income tax-break estimated a $130 million tax-collection drop from the bill in the current budget year and “up to” $309 million revenue loss in each of the next two budget years.
A year earlier, the fiscal note for the 2022 income-tax rate reduction estimated a $370 million drop when fully implemented.
The Oversight Division’s estimate was confirmed when the governor announced the “consensus revenue estimate” by his administration and legislative budget leaders forcasts a 0.7 percent general revenue loss for the current budget year that ends June 30 and just a 0.2 percent general revenue increase for the subsequent fiscal year.
That revenue increase is not much when you consider growing inflation costs. The term “general revenue” covers the variety of state revenue sources for the state that the legislature is free to appropriate to various programs.
Much of the rest of the state’s budget involves revenue sources not under the legislature’s control including motor fuel taxes for transportation, school district taxes, Conservation Department fees and much more.
So, what is available in “general revenue” is tremendously important for elected officials who seek increases for programs like education. Of course, tax cuts for Missourians, including retirement tax-exemptions is another politically popular issue — particularly with statistics showing a higher voter turnout by the elderly.
That emphasis on tax cuts was prominent in the governor’s email to the news media on the consensus revenue estimate of how much will be available for the legislature to spend.
The governor’s email included a quote from Senate Appropriations Chair Lincoln Hough, R-Springfield, that “Our projected growth in revenue is lower due to Missourians keeping more of their hard-earned money in their pocket, which increases individual household income.”
That reflects the argument of Republican legislators that lowering taxes ultimately will spur economic growth. In fact, while income tax collections are down 8.2% year to date through November, sales tax collections increased by 12.8%.
Of course, increased sales tax collections can be caused by a combination of more spending by Missourians but also by inflation that increases purchase prices covered by the sales tax. Also, a reduction in the growth of tax collections does not necessarily mean budget increases for state programs will be as limited as the consensus revenue estimate suggested.
Missouri Independent Deputy Editor Rudi Keller reminded me of another budget factor. State government has a $6.2 billion surplus of unspent funds that includes federal funds amassed during the COVID era.
So, there is a lot of money that could be used for increased funding for state programs in the next fiscal year.
However, years ago legislative fiscal conservatives warned against using one-time money for government programs that would continue after that money was gone. This all raises several fascinating budget issues for the Republican-controlled legislature in the 2024 election-year.
(Phill Brooks has been a Missouri statehouse reporter since 1970).
