Amendment 5: What's not to like? Only time will tell

In terms of Missouri's Amendment 5, elimination of the state income tax, on the August 4 ballot, it would be easy at first blush to take the position, “What’s not to like?” As a rule, the Ole Seagull believes that a retail sales tax is fairer than an income tax because just about everyone pays it, has some skin in the game, and the amount they pay is in accordance with the amount of and how they chose to spend their money.

In buying a car one can choose to buy a vehicle that costs $100,000 or one that costs $50,000. Regardless of the amount, the retail sales tax on the car would be based on the amount of the purchase. The consumer makes the choice as to what they are purchasing and its amount. In the case of the $100,000 car if the retail sales tax rate was 8%, they'd be paying $8,000. In the case of the $50,000 car, the amount of retail sales tax they pay would be $4,000.

When it comes to income tax, however, absent certain general exceptions, there is no choice. Well, there is a choice: you can work and earn income or not, but for most of us that's not really a choice. If at the end of the day your taxable income is $100,000 you pay income tax on the entire $100,000. There is no choice.

That said, however, it takes a certain amount of money to run the government. Depending on whose estimate one looks at, approximately 62% of Missouri’s budget comes from the individual income tax. On balance, the amendment appears to plan to make up for that deficit by expanding the retail sales tax into services and areas where there is currently no retail sales tax, increasing the rates of that tax, or by adjusting state spending, reforming existing tax incentives, or modifying current tax.

The amendment provides a five-year "deregulation" window: For five years following the amendment's passage, the legislature can bypass the Hancock Amendment. This grants lawmakers the authority to expand the sales tax base to new services—such as doctor's visits, rent, or car repairs—without the normally required vote of the people. It also removes existing constitutional barriers that prevented the expansion of sales taxes to any service not taxed as of 2015.

“Seagull, does anyone really know if the average Missouri taxpayer will end up with a net gain and more money in their pocket under Amendment 5?” Proponents say it will; opponents say it won’t, but no one knows for certain.

The state of Tennessee, similar to Missouri on its reliance upon the tourism industry for generating revenue, relies heavily on its sales tax to make up for having no state income tax. It taxes several major categories that are either completely exempt or taxed at a much lower rate in Missouri. Tennessee charges a 4% state sales tax on standard groceries and uncooked food ingredients while Missouri exempts groceries from the majority of its tax, applying a deeply reduced state rate of just 1.225%. Tennessee charges the sales tax on digital products such as including video streaming services (like Netflix), music streaming (like Spotify), e-books and downloaded software while currently in Missouri, these items are exempt from sales tax.

Tennessee also has an expanded sales tax base charging sales tax on many services that are generally exempt in Missouri. This includes the repair and cleaning of tangible personal property (e.g., fixing a car, repairing an appliance, mending clothing); the labor required to install tangible personal property (e.g., installing a new car stereo, setting up a washing machine, mounting a TV); cleaning, pressing, or laundering clothing and textiles; the right to use or access downloaded software, cloud programs and Software-as-a-Service (SaaS), along with digital books and movies.

“Seagull, are you saying that those same items could be taxed in Missouri if Amendment 5 passes?” Absolutely not. The Ole Seagull doesn't know what will be taxed but neither does anyone else at this point. One thing is certain, however; there has to be additional revenues to make up for the loss of income when the proceeds from the personal income tax are no longer available to fund the state government.”

“Doesn’t Amendment 5 require local governments to reduce local taxes based on the increased revenue they will get from the expanded sales tax base? Won’t that, coupled with the elimination of the personal income tax, reduce the overall total amount of taxes the Missourians pay?” The answers in order are ‘Yes’ and ‘Only time will tell.’