Repealing Missouri’s Deduction for Federal Income Taxes Paid Would Ease Budget Woes and Improve Tax Fairness
A new report released today by the Institute on Taxation and Economic Policy (ITEP) finds that Missouri could receive upwards of $394 million per year if it were to repeal its state income tax deduction for federal income taxes paid. According to the report, Topsy-Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head, Missouri is one of just six states to offer this costly tax break. Together, those states will lose more than $2.5 billion in 2011 from this policy.
“Missouri’s deduction for federal income taxes paid deprives the state of millions of dollars in needed funds and benefits almost exclusively the very wealthiest members of our communities, failing to promote tax fairness,” remarked Rea Kleeman, Interim Chair of Missourians for Tax Justice (MTJ). Meg Wiehe, ITEP’s State Tax Policy Director added, “Right now, legislators across the country are searching for solutions to mounting budget deficits, solutions that will allow them to fund vital public investments without placing additional responsibilities on those families struggling to make ends meet. Repealing costly, inequitable, and ineffective tax breaks like Missouri’s deduction for federal income taxes paid are the first place they should look.”
In practice, very few working class Missourians would benefit from the repeal of the deduction for federal income taxes paid. Missourians in the top 20% receive 59% of the benefit from the deduction, while the poorest 20 percent of taxpayers hardly see any benefit from the deduction. In fact, taxpayers in the top 1% of income earners receive an average benefit of $543 from the deduction compared to the bottom 20% who receive just $1 on average.
The deduction for federal income taxes paid is also quite expensive. As the report notes, this deduction is expected to cost Missouri $394 million in 2011, which equates to 8% of the total revenue generated by the state’s income tax. As a result, Topsy-Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head finds that repealing of the deduction for federal income taxes paid could bring in substantial and necessary revenue to the state’s coffers. Said Wiehe, “Missouri lawmakers face a clear choice: keep in place a tax break that largely benefits the wealthy few or repeal that tax break and fund the investments in education and infrastructure that will speed economic recovery.”
In addition to the release of the ITEP report on March 30, Rep. Jeanette Mott Oxford (District 59, St. Louis City) also filed HB 930 to end the Missouri deduction for federal taxes paid. MTJ applauds Rep. Oxford for taking action to end this poorly targeted feature of Missouri taxes.
Missourians for Tax Justice (MTJ) is a statewide grassroots advocacy organization comprised of more than 30 religious, labor, and community organizations. MTJ Justice supports a fair and balanced state tax structure that will produce adequate revenue for needed public services.
Based in Washington, DC, the Institute on Taxation and Economic Policy is a non-profit, non-partisan research organization that seeks to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. Copies of A Topsy-Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head, including detailed estimates of the impact repealing the deduction for federal income taxes paid would have in each of the six states highlighted in the report, are available at www.itepnet.org.