The Missouri General Assembly convenes in a special session in a few days to consider a significant cut in the state’s income tax and other issues.
The past and the present and two seemingly unrelated situations suggest this is a time to tread carefully—-although, this being an election year, politics could take a higher priority than should be taken in considering the tax cut.
Let’s set aside politics for a few minutes and raise some concerns based on years of watching state tax policy be shaped.
Days after Governor Parson announced he was calling the legislature back to cut the income tax, President Biden announced his program to eliminate a lot of college student loan debt. The two issues, seemingly wide apart, actually are related in this context. It will take some time to explain.
We begin with the Hancock Amendment. In 1980, Springfield burglary alarm salesman—later Congressman—Mel Hancock seized on a tax limitation movement sweeping the country and got voters to approve a change to the state constitution that tied state government income to economic growth. If the state’s tax collections exceeded the calculated amount, the state had to send refund checks to income taxpayers.
Some of the Hancock Amendment was modeled on Michigan’s Headlee Amendment adopted two years earlier. But the timing of Hancock could not have been worse. While Michigan’s amendment was passed during good economic times, Missouri’s Hancock Amendment went into effect during a severe economic recession considered to be the worst since World War II.
Missouri therefore established a limit that had a low bar. There are those who think the state has suffered significantly because of that.
Except for one year the Hancock Amendment has worked well. Too well, some think, because it has encouraged state policy makers to underfund some vital state programs already hampered by Hancock’s low fiscal bar.
In 1998, the state revenues exceeded the Hancock limit, forcing the Revenue Department to issue about one-billion dollars in refund checks (averaging about forty dollars per household).
The legislature decided it did not want to repeat that. So it decided to cut taxes to keep from hitting the Hancock limit again. Not a bad idea, except that when the national and state economies took a dive, financing of state institutions and services was severely lowered. Had the refund program remained in effect, the economic downturn would have meant no refunds but institutions and services would have been hurt far less because the tax base would have stabilized funding.
The MOST (Missouri Science and Technology) Policy Initiative, a fiscal think tank, has recorded twenty tax cuts from 1993-2013. The result is that Missouri is almost four-billion dollars under the revenue limit set by Hancock, according to the latest annual study done by the state auditor.
Missouri is unable to do a lot of things it could be doing because the legislature eroded the state tax base instead of issuing checks.
Now the legislature will consider an even deeper tax cut.
Nobody likes to pay taxes. But there has been cultivated in our state and nation a culture that seems to think the benefits of government—education, public safety, infrastructure, care for the sick and elderly and indigent, and other parts of our lives we take for granted—should be free. Or, to the way of thinking of some people who don’t need those things, eliminated.
How does the Biden program to forgive billions of dollars in student loans provide a cautionary element to consideration of the Parson tax cut?
When I was in college in the previous century, I knew many people who worked their way through school. Some could do it with part-time jobs on campus or in the community. I had one friend who worked for a semester and then took classes for a semester. I have one friend who financed his college education by selling thousands of dollars worth of Bibles and other religious books during the summer.
But the expense of a college education today makes that kind of self-financing impossible, or almost impossible. And here is a major reason why.
Back when my generation and the generation after us, probably, could work our way through school, the state provided for a substantial cost of higher education. Today, the percentage is much lower.
Last year, one of Missouri’s most distinguished attorneys—who also was appointed by Governor Parson to the Coordinating Board for Higher Education—W. Dudley McCarter, noted in The Columbia Missourian, “After striving to attain this goal over the past 10 years, the state of Missouri has now succeeded in becoming the state that is at the very bottom in funding for higher education. No, it is not Mississippi, Arkansas or Alabama — it is Missouri. Over the last 10 years, state funding for higher education has increased nationwide at an average of 12.40% with some states increasing funding by over 40%. In Missouri, however, funding has decreased during that same period by 13.70% — the only state that had reduced funding. When adjusted for inflation, the decrease is actually over 26%. The national average for funding is $304 per student, with some states providing over $700 per student. In Missouri, the funding is less than $200 per student.”
The downward trend has been going on far longer than that. The internet site Ballotpedia has noted that state appropriations per full-time student dropped by 26.1% in the first decade of this century, about twice the national average.
A study done a few years ago for Missouri State University showed that, nationally, student higher education tuitions made up 30.8% of higher education revenues in 1993. By 2018, tuition was financing 46.6% of higher education costs—and the costs were higher. It was during that time that student borrowing ballooned to offset declining percentages of state and federal higher education support.
The Biden student loan forgiveness program deals with those who have debts already. It does nothing to prevent current or future students from incurring crippling student debts, because government has reduced its support for higher education. And now, the legislature is being asked to reduce state revenues even more.
We lack the expertise to get too far into the weeds of economic nuance. But reducing the state’s ability to meet its fiscal responsibilities in the future, whether it’s in higher education or numerous other fields is a long-term issue that must be approached with great caution.
Things are flush right now, thanks partly to inflation and the massive injection of federal Covid relief funds in the last few years. But Missouri still is far short of its own limit on the state tax burden and still far short in funding numerous human-service needs.
It is politically popular in an election year to cut taxes. The public seldom recognizes the long-term penalties that might result. Tomorrow’s college graduates might be among those paying a high price for today’s popular tax cut and incurring new student debt burdens. And if a recession hits next year, as some economists keep predicting, some unfortunate results of this year’s tax cut could become painfully clear.
Governor Parson has taken a wise step in meeting with members of both parties to explain why he thinks a tax cut is appropriate today. We suspect he had an easier sell with member of his own party than he did with the other side. We expect some passionate discussion of this issue during the special session.
We also expect a cut will be enacted. We hope, however, that we do not have a repeat of the unfortunate post-refund tax cuts of decades ago. We must be careful as we consider what we might do to ourselves, our children, and our friends. Tread carefully.