The piece has been updated to reflect the latest version of the bill passed by the Missouri Senate, which no longer eliminates the state earned income tax credit, reduces the corporate income tax, or changes the graduated income tax rate structure with a flat tax. The estimates of the bill’s overall cost and how much the tax changes would benefit the top 1% have been updated accordingly.

Conservative lawmakers’ preference to cut taxes is nothing new, but Missouri state lawmakers are currently considering a tax measure that would privilege the state’s wealthiest individuals in ways no other state with an income tax has done—by fully exempting all capital gains income from taxation. This change would exacerbate an already regressive state tax system, forcing low- and middle-income Missourians to shoulder a larger share of financing for state public services.

The bill being considered, HB 798, would cost roughly $1 billion in lost revenue.1 Beyond exempting capital gains from taxation, the bill would make other tax changes including some that could help lower-income earners, such as exempting diapers and feminine hygiene products from sales tax and increasing property tax exemptions for seniors. However, the impact of these changes pales in comparison to the benefits that would accrue to those with the highest incomes.

In fact, the bill would give the top 1% in the state an average tax cut that is 320 times larger than the tax benefits going to the middle-fifth of tax filers, according to an analysis from the Institute on Taxation and Economic Policy (ITEP). All told, ITEP estimates that 80% of the proposed tax cuts would go to the top 5% of individuals (those earning $273,000 a year or more) with two-thirds of the benefits going to the top 1% (those with incomes above $660,000 a year).

The bulk of these top-weighted benefits comes from the proposed exemption of capital gains from income taxes. In 2022, IRS data showed that 65% of all capital gains income in Missouri went to the richest 0.8% of tax filers. There are few, if any, other tax changes that lawmakers could make that would be more heavily tilted toward the wealthiest individuals.

Exempting capital gains from state income taxes would be unambiguously bad for the vast majority of working people in Missouri. Most would not receive any direct tax benefits, and the lost resources to public budgets would mean fewer resources for public schools, higher education, public hospitals and clinics, roads, public safety, and other public services that benefit all Missourians.

Capital gains already receive highly preferential treatment in the federal tax code, and this has led to a whole tax avoidance industry where the rich game the system by reclassifying income as capital gains rather than ordinary income just to get a lower tax rate. Over the past decade, there has been a striking shift in the composition of CEOs’ pay into forms that are taxed at capital gains rates rather than as ordinary income (see section 7 in EPI’s most recent report on CEO pay here.) States like Missouri making this preference for capital gains even stronger would swell this tax avoidance industry.

Further, lower capital gains taxes incentivize firms to undertake stock buybacks rather than pay dividends to shareholders. Stock buybacks boost stock prices and allow for capital gains to be realized, while dividends tend to be taxed differently. The shift toward buyback-driven capital gains and away from dividends helps insiders of the firm and active traders who are willing to make lots of moves in and out of particular stocks, but it penalizes “buy and hold” investors—like the vast majority of typical workers who own the small amounts of stock they have in the form of 401(k)s or other investment funds.

Already, there is considerable disagreement about just how enormous a loss in revenue this bill would ultimately create. The outcome of the “Kansas experiment” of the mid-2010s is instructive here. In 2012, Governor Sam Brownback signed a law giving highly preferential tax treatment to “pass-through” income (i.e., business income earned by partnerships, sole proprietorships, and S-corporations.) While marketed as a “small business tax cut,” pass-through income is second only behind capital gains in being the most concentrated type of income. In 2021, for example, 68% of partnership income was claimed by taxpayers with over $1 million in income. The result of the Kansas experiment was a fiscal disaster, with even steep cuts to education and other vital services failing to stop a decline in the state’s bond rating.

In normal times, these tax changes would be an insult to working- and middle-class households in the state. The fact that state lawmakers are pursuing them now—as the Trump administration is sending the economy toward a recession while simultaneously pursuing steep cutbacks in federal aid to states—displays an astounding disregard for the welfare of working people in Missouri. If a recession comes, the state will need durable sources of revenue to continue providing vital services and ideally offset some of the loss in demand that will occur as Missouri workers lose jobs and income. The most durable source of tax revenue is—shocker—to tax the people who have the most money. A large tax cut for the wealthy right now would only set the state up for more pain and austerity when a recession comes.

Note

1. Cost estimate and distributional analysis provided by the Institute on Taxation and Economic Policy. Their analysis of a previous version of the bill, which would have also replaced the state’s graduate income tax rate structure with a flat tax, cut the corporate tax rate, and repealed the state earned income tax credit, predicted a loss of $1.3 billion in revenue.