According to Tax Foundation data, Missouri doesn’t rely on property taxes for revenue as heavily as other states do. Our state ranked 32nd in property tax collection as a percentage of state and local tax collection in fiscal year 2017. This may seem like a good thing—lower property taxes for Missourians, right? Unfortunately, it’s not that simple. Relying less on property taxes means that Missouri is relying more on income and sales taxes, which could be hurting our state’s growth.
Missouri ranked 14th and 18th in 2017 for income and sales tax collection as a percentage of state and local tax collection, respectively. I’m sure many Missourians can believe those rankings; with earnings taxes in our major cities and special taxing districts piled up across the state, we pay a lot of income and sales taxes. Though all taxes mean money out of our pockets, they don’t all have the same effects on economic growth.
Research (including research from SMI) shows that income and sales taxes have a larger negative effect on economic growth than property taxes. Income and sales taxes distort decisions related to working and spending, two huge drivers of economic growth. Decisions on property tend to be more permanent; a 3 percent increase in sales taxes may make you spend less at the store, but a 3 percent increase in property taxes probably won’t make you sell your house. This is why property taxes tend to distort the market less.
Revenue from income and sales taxes also tends to be more volatile than revenue from other kinds of taxes. During economic downturns (and especially during an economic shutdown), income and sales tax collections will fall quite a bit as people lose their jobs and have less money to spend. We won’t necessarily see such a large decrease in property tax revenue due to the same reason discussed above; it’s harder to make quick, short-term decisions about big investments like property. This is bad news if government-funded programs and services rely heavily on income and sales taxes for revenue.
It’s important to understand how our taxing decisions affect the overall growth of our state. Relying on income and sales taxes creates problems, and other states seem to be clued into this. It may be time to think about shifting toward property taxes and away from income and sales taxes in order to stay competitive with other states and promote economic growth in Missouri.