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Tax plan may save little for many

Tax plan may save little for many

March 11th, 2013 by David A. Lieb, Associated Press in News

An overhaul of Missouri's tax policy embraced by the Senate could cost the state hundreds of millions of dollars annually.

What would that mean for residents?

Perhaps no more than a few dozen dollars in savings for a typical household.

The proposed mixture of income tax cuts and sales tax hikes included in the Senate legislation could have a much larger benefit for the wealthy, particularly those running their own small businesses. Some lower-income families might also gain a little more. But for seniors living on Social Security benefits, the proposed tax changes could end up costing more.

The bottom line for Missouri residents will vary according to a lot of factors, including their means of income and the type of things they buy.

But for most, "it's not a big windfall," said Jim Moody, a former state budget director who now is a lobbyist and consultant.

Republicans who are the primary force behind the Missouri legislation hope it will help at least some businesses and residents, who they fear may move to Kansas to reap the benefits of its newly enacted income tax cuts. They contend Missouri must cut income taxes to stay economically competitive. But many Democrats remain doubtful about the plan, warning it could jeopardize funding for schools and important state services.

The central part of the Missouri legislation would gradually cut the top income tax rates for individuals and corporations by three-quarters of a percentage point over five years while also allowing people to deduct half of the business income that gets reported on their personal tax returns. Individuals with adjusted gross incomes below $20,000 also would benefit from a provision nearly doubling their personal tax deduction.

To offset part of that lost tax revenue, the legislation would gradually increase the state sales tax by one-half cent over five years.

The eventual net result for the state could be a revenue loss ranging from $450 million to $950 million annually, according to various estimates.

The Associated Press analyzed the financial effect of the income tax cuts on individuals with assistance from Moody, who supplied several hypothetical tax returns prepared by a certified public account. The AP estimated the effect of the sales tax hike on individuals by using an online calculator provided by the Internal Revenue Service. It verified the general conclusions with Brian Schmidt, a former director of the Legislature's Joint Committee on Tax Policy who now runs the Missouri Wonk consulting firm.

The analysis shows that a family with two working parents and two children earning slightly more than Missouri's median household income of about $45,000 could get an income tax reduction of about $90 if the Senate legislation were to become law. But that family might have to pay about $55 more annually in sales taxes. The net result: A savings of about $35 a year.

That's about enough money for a family dinner at a sit-down restaurant or a half-tank of gas in the family's sports utility vehicle.

"For all intents and purposes, that's a rounding error in their overall income," Schmidt said.

The benefit could be a little larger for a young family of two working adults and a baby earning a combined total of $30,000 annually. If both parents could claim the newly proposed deduction for lower-income individuals, the family might save around $165 in income taxes while paying about $30 more in sales taxes - a net savings of about $135 to the household budget.

The nonprofit Missouri Budget Project, which analyzes fiscal policies with an emphasis on their effect on the poor, came up with slightly different figures. It used general income tax assumptions instead of specific tax returns and calculated a higher sales tax hit while relying on data from the federal Bureau of Labor Statistics' Consumer Expenditure Survey.

Tom Kruckemeyer, a former state economist who now works for the Missouri Budget Project, concluded that many low-income households and senior citizens would get no benefit from the income tax cut, because they may not currently be paying any income tax due to existing deductions. Most Social Security benefits, for example, already are exempt from Missouri income taxes.

According to Kruckemeyer's calculations, a family making Missouri's median household income could save as much as $130 a year from the tax changes. Those tax savings could rise to an estimated $1,300 for a household earning $250,000 annually, under his analysis.

"The big winners in this are probably going to be the people with much higher incomes," Schmidt said.

To that extent, the proposed income tax cut could help people build up wealth, which generally creates a "more pro-growth" economy in the state, said Patrick Ishmael, an analyst at the nonprofit Show-Me Institute, a research group that supports free-market policies. Ishmael did not have enough details on the Senate legislation to calculate the financial impact on various individuals.

But he, too, questioned whether the income tax cut would be large enough to tip the balance to Missouri in its tax-cutting competition with Kansas.

"This isn't going to fix the problem, unfortunately, if this is the one final step," Ishmael said.

David A. Lieb has covered state government and politics for The Associated Press since 1995.