Missouri House votes on party lines to eliminate income tax on capital gains

A bill to remove the state income tax on profits from the sale of long-term investments passed the Missouri House on Thursday, Feb. 13, on an almost pure party-line vote.

The bill, projected to cost the state treasury $341 million in the first year and $237 million in subsequent years, exempts money known as long-term capital gains, money earned on stocks, land or other assets held for a full year or longer. House Speaker Pro Tem Chad Perkins, the sponsor of the bill, said it is intended to help small-business owners and others who sell assets as they approach retirement.

“These folks have worked their entire life and have counted on that to be their retirement,” said Perkins, a Republican from Bowling Green. “And that’s who this is geared toward.”

The bill passed 100-48, with only state Rep. Raychel Proudie, a Democrat from Ferguson, crossing party lines to support the legislation. Another Democrat, state Rep. Marlene Terry of St. Louis, voted present.

Democrats opposed the bill, said state Rep. Steve Butz of St. Louis, because it will make it harder for the state to sustain education and other services.

‘The message from the Republican side is, as just stated, ‘I’m just here to cut your taxes,’” Butz said. “What they don’t ever really address is either cutting services or they’re just going to rotate or shift the tax burden to another form of taxation.”

Gov. Mike Kehoe has championed the cut as the first step in eliminating the state income tax. An identical bill is awaiting debate in the state Senate.

Missouri is sitting on a large general revenue surplus but current revenues are falling. Through Tuesday, general revenue collections for the year are down more than 2%, and if the trend continues, the state will receive about $300 million less than in the fiscal year that ended June 30.

At the same time, demands for general revenue are growing. Kehoe’s supplemental budget to finish the current fiscal year sets aside $142 million to replace a shortfall in lottery and casino revenues in public schools. And the budget for the coming year increases general revenue allocations to the Department of Elementary and Secondary Education by more than $400 million, with public school backers clamoring for an additional $300 million to fully fund the state foundation formula.

During Thursday’s debate, Perkins said states that already exempt capital gains — Texas, Tennessee and Florida — have economies growing faster than Missouri. A cut would attract new business to the state, he said.

Those other states have higher taxes than Missouri in several areas, Butz said after the vote. He reminded colleagues during debate that if the state cuts taxes too much to sustain services demanded by voters, it will be hard to restore them. Any tax increase above about $100 million requires a statewide vote.

“If we make a mistake here, there’s no going back,” Butz said during the floor debate.

Since the enactment of a 2014 tax bill, the top income tax rate has fallen from 6% to 4.7%, with two additional cuts of 0.1 percentage point already part of state law. Those cuts will take place when the state sees year-over-year general revenue growth of $200 million.

In the intervening years, the Republican-dominated Legislature has also eliminated the income tax on Social Security benefits and cut the top corporate tax rate.

The impact of the state capital gains exemption could be lessened if Congress accepts the proposal pushed by President Donald Trump to eliminate what is known as the carried-interest exemption. That allows investment fund managers to pay the federal capital gains rate, which is lower than the general tax rate under the federal income tax.

“The whole concept of capital gains tax elimination is so that we can grow the economy, so we can get those high paying jobs to Missouri and businesses can reinvest,” said state Rep. George Hruza, a Republican from St. Louis County.

Democrats, however, see the cut as part of a political tax policy that doesn’t meet state needs.

“Their tax policies,” said House Minority Leader Ashley Aune, “seem to be far more about the message it sends to voters than actually saving the average Missourian money.”

The Missouri Independent is a nonpartisan, not-for-profit news organization covering state government, politics and policy.