JEFFERSON CITY, Mo. – The U.S. Congress has crossed the I’s and dotted the T’s with their latest version of tax reform legislation, and the signature by President Donald Trump has officially finalized the $1.5 trillion federal tax overhaul package.
The sweeping reform is some of the largest cuts in the nation’s history, the largest rewrite of the federal tax code since the Reagan administration. The tax reform package could mean most Americans will see a tax cut starting next year, bringing rate cuts for American companies and doubling the deductions that millions will claim on annual returns. President Trump is calling it an early Christmas present for hard-working Americans.
According to the Tax Policy Center, an estimated 80 percent of taxpayers will see a tax cut next year, but Democrats have called the measure a scam, saying it will benefit the wealthy.
Under current law, the standard deduction for an individual is $6,300, and $12,600 for a married couple. The proposed tax reform being debated at the national level would roughly double those numbers, up to $12,000 for individuals and $24,000 for married couples. The individual tax cuts carry a sunset clause for 2026.
The final bill that was passed out of the bicameral legislature also slashes the corporate tax rate from 35 percent to 21 percent, which will be a permanent addition to the code.
“You’ve ended the over-regulation of the American economy,” Sen, Majority Leader Mitch McConnell said.
“This is an historic occasion,” said Ray McCarty, president and CEO of Associated Industries of Missouri (AIM). “We look forward to the economic stimulus that will be provided by this significant reduction in tax burden on American businesses and all taxpayers. Some so-called experts are against the bill because the reductions in the individual income tax are temporary. This is a bit disingenuous as it is very unlikely any Members of Congress, including those voting against the bill today, will allow these tax cuts to expire. That would be an act of political suicide. We suspect the root of the opponents’ objections to the bill is there will be less money for the government to spend and more money in the pockets of American workers and job creators. For some, that is a problem. For the rest of us, it is cause for celebration.”
But the passage of the reform has also left many wondering about the effects it will have in the Show-Me State, particularly its state budget, as so much of the state’s tax laws are tied into the federal code. Some have expressed much concern over the new changes, calling it a giveaway to special interests that will be paid for with higher taxes on working Missourians and cuts to services.
“This is a one-two punch for working families, kids, seniors, and people with disabilities. Calls to cut nutrition assistance, disability insurance, and health care are a slap in the face to struggling families when Congress just voted for a bill that will increase the deficit by nearly $1.5 trillion,” Amy Blouin, Executive Director of the Missouri Budget Project, said in a statement. “Missourians want little more than to provide a better future for their families. But cuts to the safety net that helps Missourians meet their basic needs will make it harder for families struggling to provide for their children. And because proposals to cut federal spending almost always involve shifting costs to state and local governments, it will put even more pressure on Missouri’s already stretched budget to fund community services that benefit everyone.”
Some have speculated that an increase in the standard deduction could mean a potential loss to the tune of up to $1 billion, and state leaders are still trying to figure out what exactly the effects will be, but that is easier said than done, as Department of Revenue Director Joel Walters will tell you.
“One of the things we keep talking about is that the ink is still wet. Everybody is still going through line by line and thinking about how this affects different things that can go in different directions,” Walters said. “We still have work to do before we have it completely locked down. In fact, it’s probably fair to say that we’ll have to see how this unfolds over time.”
And with such little time to analyze the new reform changes, all 1,100-plus pages, it can be hard to develop any exact numbers. Calculating the new changes and their effect is a complicated task, one that will take some time to see the full picture. But Walters says that a rough preliminary idea is that the federal tax changes could result in a loss – or gain – to an upwards tune of $100 million in Missouri tax revenues.
As Walters explained during an interview with the Missouri Times, Missouri is one of 20 states with laws that automatically link the federal tax code to the state tax code. Missouri utilizes rolling conformity, meaning they follow the federal law for both individual and corporate income taxes, and the changes at the federal level are immediately changed at the state level as well. Other states use static conformity, which means they conform to the rules according to a given date.
“That’s why the changes at the federal level will have an immediate impact,” Walters said. “This bill is a little different because it is designed on a static basic to lose $1.5 trillion… that’s sort of makes it different from the usual situation, which is why we have the discussion not just about how big of an increase this is, but actually what is it and what direction it will go.”
Walters noted that 71 percent of general revenue in the state of Missouri comes from the individual income tax, so anything that changes that calculation could drastically change things.
“So people naturally look at that and say it must be a really big impact, and it is,” Walters said, explaining why so many people might be nervous about the effects. “But then you remember that it’s an 1,100 page bill, and there are things that go both directions throughout the bill. And as a result, the impact on the state of Missouri is the net impact of all of those changes. So you start with a big decrease in general revenue from the standard deduction, but then there’s a loss of personal exemptions as well, and businesses are allowed to deduct less of their interest expense, and companies are required to bring back their overseas earnings in a lump sum payment. You start looking at all of that, and they all go the other direction and start increasing taxable income.
“So when you look at all of those things, based on what we’ve seen, I think it probably narrows it down to within a relatively narrow band of plus or minus $100 million.”
“Overall, I think it’s a good step, but by no means a perfect one. It’s a step in the right direction,” Carl Bearden said. “You get people arguing that the rich are getting a bigger tax cut, but they’re not, they just pay more because their dollar amounts are more.”
Bearden is a former Speaker of the Missouri House and budget chair, and pointed out that the revenue in question is not the state’s money, but belongs to the citizens. But he agreed with Walters’ assessment, echoing his analysis.
“At the state level, because we’re linked to the federal very closely, a lot of our stuff flows with it. Our state reflects things because we pick it up off of the federal form, which is where people are saying we will lose all of this money. But what they’re not looking at is the reductions in deductibles. And once you get all of the mechanics out of it, there’s some that will cost the state money, but others put money back in. And when you balance all of that out, I think you come pretty close.”
Both men agree that there’s always more work that could be done, but the benefits over the longterm could be quite great if it lives up to the expectations of the GOP leadership.
Walters said that the federal reform could serve as a springboard for more reform, particularly items that were discussed by the Governor’s Committee for Fair, Simple, and Low Taxes earlier in the year, and emphasized that room to grow in addition to these changes could mean more economic success, that the state revenues could potentially see a boost if the tax changes lead to an economic boost as President Trump has stated.
“I think there’s actually an opportunity to do more,” he said. “If we still do those things, it’s even more impactful in the state of Missouri. I don’t think it changes the direction, it just makes it more powerful if we get something done in that space.”
Walters also noted that the lower federal corporate tax rate could mean some businesses will restructure their classifications, and potentially generate more corporate taxes for Missouri.
And as Missouri’s legislators and departments work to find out just what all will be affected, Walters said that his department will be doing their best to inform the citizens of the changes and help them navigate through it all and put resources on the website and embedding instructions in the documents to explain the changes from before. He also noted that the Department of Revenue recently opened back up its Jefferson City Tax Assistance Office, which he says will be able to provide assistance if needed.
Walters summed up his assessment of the bill, particularly those who have expressed concern about the sunset clauses.
“Would it be better without sunsets? Sure it would. Would it be better if there were some other aspects to this in terms of spreading out benefits in slightly different ways? Sure. But the U.S. was fundamentally uncompetitive. Things had to change, and this changed, so the U.S. will be way more competitive from a business environment perspective, so you could say ‘Wouldn’t it be better if?’ to a lot of things, and the answer would be yes to a lot of questions, but boy, it’s a long way down the road to getting what we needed.”
He said that perhaps the best way to wrap it up was to echo one of his former PwC partners, Pam Olson, who quoted The Rolling Stones:
“You can’t always get you want, but if you try sometimes, you get what you need.”
Benjamin Peters is a reporter for the Missouri Times and Missouri Times Magazine, and also produces the #MoLeg Podcast. He joined the Missouri Times in 2016 after working as a sports editor and TV news producer in mid-Missouri. Benjamin is a graduate of Missouri State University in Springfield. To contact Benjamin, email firstname.lastname@example.org or follow him on Twitter @BenjaminDPeters.