As Missouri lawmakers prepare to build the new state budget, they will be dealing with a bleak revenue outlook—and scant prospects for improvement, experts say.
The state collected $120 million less in individual income tax payments last year than in 2017, according to budget officials. A more dire picture appears in the daily collection reports from the Missouri Department of Revenue. On January 10, income tax revenue was down $425 million from the same date a year ago.
Missouri enjoys one of the nation’s lowest unemployment rates—3.0 percent in November—but it hasn’t spurred large economic growth.
“You have low unemployment but low growth,” Iowa State University economics professor David Swenson said. “That does not translate into robust revenue expectations for the upcoming year.”
If the revenue forecast worsens, the options are limited. Missouri can’t raise taxes without voter approval. If budget cuts are necessary, K-12 and higher education are likely to take the hit.
Gov. Mike Parson can withhold money from the budget when the state is financially squeezed, and restore it if conditions improve. He downplayed fiscal concerns in a statement earlier this week.
“(The) State Budget Director believes that the state is in a strong financial position and there is no need to make withholdings to programs at this time,” he said “Missouri taxpayers have been able to keep more of their hard earned money, directly benefiting from a series of state and federal income tax cuts, which we strongly support.”
But the 2014 tax cut—still being phased in—has not paid off with the kind of economic growth Republican supporters envisioned.
A leading Democrat on the Missouri House budget committee cited the cut as the reason for low revenue growth. It will cost the state $320 million in the upcoming fiscal year.
“What happens if the state doesn’t keep up with growth even in relatively good times?” Rep. Kip Kendrick, D-Columbia. “The next downturn would look pretty devastating for the state.”
House Speaker Elijah Haahr, R-Springfield, said he’s “very happy” with Missouri’s tax cuts.
“Our state continues to grow, unemployment’s low,” Haahr said. “I think our tax policy in both 2014, the one we passed last year...I think those are all very helpful to the state’s economy.”
Asked about the revenue drain, Haahr dismissed it as an issue.
“It’s always easy to say oh because of this we lost all this money,” he said “We don’t know how that growth would have changed depending upon whether or not we’d done the tax cut.”
Missouri was one of 40 states that took in more money than forecast in fiscal 2018 (which ended Sept. 30), according to a survey by the National Association of State Budget Officers. It carried a $280 million surplus into FY 2019, but is now one of just five states with revenue collections coming in below projections.
Only one state west of Missouri, Idaho, was in similar straits. The others were on the east coast: New York, North Carolina and Maine.
The story is far different in Kansas, which was plagued by budget shortfalls during the tax cuts of the Gov. Sam Brownback era. Before the GOP-controlled legislature overrode his veto of a tax increase in 2017, the state routinely missed revenue targets, which led to repeated budget cuts. It is one reason the state is sitting on a $100 million surplus.
The difference between Kansas and Missouri comes down to tax rates, said Ken Kriz, a professor at the University of Illinois at Springfield who has studied Brownback’s tax cuts.
The argument that an increase in economic growth will pay for the lost revenue “has almost never worked out,” Kriz said.
“I really don’t think that fiscal policy that states undertake in the short run can have much impact on the economy,” he said.
With the exception of portion of 2018, Missouri’s economic growth has trailed the national rate the last 15 to 20 years. The most recent federal data shows that from 2016 to 2017, payroll employment in Missouri grew by 1.06 percent.
“(That’s) an extremely low rate of employment growth,” Iowa State’s Swenson said.
Joseph Haslag, an economics professor at the University of Missouri and chief economist for the conservative Show-Me Institute, said there are multiple reasons. One may be state and local governments’ increasing use of tax credits, TIFs and other incentives to spur new development or job creation.
“The rosiest optimist is going to say somehow it looks like we might have turned a corner and with the low unemployment rate maybe things are going to go really well,” Haslag said.
He added: “I’m not terribly hopeful that the growth picture is going to pick up. I just don’t see what the trigger would be that would spark us into a significant uptick in our growth rate.”
Sen. Dan Hegeman, a Republican from Andrew County who leads the chamber’s appropriations committee, pointed to earlier errors in the state’s withholding tables as a possible reason for the revenue situation.
The Senate budget chief made it clear Republicans in the state are aware of the turmoil that followed Brownback’s tax cuts in Kansas.
“We’ve seen our friends to the west’s experiment,” Hegeman said. “I think we’re being duly cautious.”
The Star’s Jason Hancock contributed to this report.