Congressional tax reform could shift hundreds of millions from Missouri to state taxpayers

UPDATE: This story has been updated to include additional information from the Department of Revenue.

Under the tax reform bill passed by the U.S. House, hundreds of millions of dollars could stay with Missouri taxpayers instead of funding state government.

And Springfield taxpayers stand to save more than other Missourians because locals are more likely than the average state resident to use the standard deduction for individual income tax returns.

By law, Missouri's standard deduction is the same as the federal standard deduction. Residents can either take the standard deduction or itemize other deductions.

This is known as "rolling conformity," said Joel Walters, director of the Missouri Department of Revenue.

"If President Trump were to sign a bill that changes something we're coupled to, it would immediately change for Missouri as well," he said.

Data from the Internal Revenue Service says there were almost 2.8 million individual income tax returns filed in Missouri in 2015. About three out of four filers took the standard deduction.

The House bill would raise the standard deduction to $12,200 for individuals and $24,400 for married couples, USA Today reported. In 2015, the deductions were $6,300 for single filers and $12,600 for joint filers, according to the IRS.

The IRS data reflects how many single and joint returns were filed, as well as how many people took the standard deduction, but it does not specifically break down by state how many single and joint filers claim the standard deduction.

In a rough estimate, the News-Leader attempted to calculate how much money taxpayers would save — and how much Missouri would lose — under the House tax plan.

These calculations were performed and reported by the Columbia Tribune about two weeks ago. The News-Leader's later calculations generated similar results.

It's estimated that the average individual could save about $336 and the average married couple could save about $672.

Assuming everyone took the standard deduction, the state's married taxpayers could save about $629 million combined, and individuals could combine to save about $377 million.

Those figures together equal about $1 billion that would stay with taxpayers instead of Missouri government.

More conservative math — figuring that about 74 percent of taxpayers would again take the standard deduction — drops that figure to about $855.4 million taxpayers keep instead of paying to the state as taxes.

(The Department of Revenue provided the News-Leader with different data of its own after this story was published. The Department of Revenue's data shows that while the shift could indeed amount to hundreds of millions of dollars, lost revenue could top out at about $707 million.)

Of the 200,630 people in the Springfield metropolitan area who filed tax returns in 2015, almost 80 percent of individual income tax returns used the standard deduction.

An estimated $69.3 million would stay with Springfield taxpayers if Missouri's standard deduction remained coupled to the federal deduction and the House bill becomes law.

Savings for individual Missouri taxpayers might be higher next year anyway if the state's top income tax rate drops from 6 percent to 5.9 percent as expected. Missouri's tax structure has a top bracket for people who earn more than $9,000 per year;

Assuming that a filer is in the top income bracket — and most Missourians are — the Department of Revenue estimates that, if the standard deduction were to double, individual filers might save $372 per year, with married joint filers saving $743 per year.

Walters, the department's director, declined to discuss specific numbers during the interview. He said the state was monitoring congressional tax reform efforts and continually modeling revenue projections.

The standard deduction is not the only area of tax code where Missouri follows federal rules. Changes to tax law for itemized deductions, mortgage interest, charitable deductions and corporate income tax also could affect state revenue, Walters said.

"Because we are tied to a variety of those things, it will be the net of all of those changes," Walters said. "Until you see a package starting to form where you can look at all the pluses or minuses, I think it's too early" to speculate on changes to Missouri's revenue situation.

Walters added that about 71 percent of Missouri's general revenue — the money state lawmakers control in the budget process — is collected as individual income tax. He struck a neutral tone when asked about the possibility of Missouri collecting $1 billion less in taxes.

"I'm neither happy nor unhappy about changes in revenue," Walters said.

Another person keeping an eye on changes in revenue is Rep. Scott Fitzpatrick, the chair of the House Budget Committee.

"If you have a billion-dollar budget deficit starting off in addition to the other challenges we're having with Medicaid growth, you're basically looking at a situation that's three times as bad as the situation we had last year," said Fitzpatrick, R-Shell Knob. "... I don't mind cutting, I just don't like having to deal with self-inflicted wounds if we can avoid it."

Upon signing the budget bills for the current fiscal year, Gov. Eric Greitens immediately cut more than $250 million in spending, blaming lagging state revenue and increasing health care costs. Medicaid spending has grown to represent more than one-third of Missouri's $27 billion budget.

Additional revenue reductions in the $500 million to $1 billion range could lead to a "no holds barred" situation, Fitzpatrick said, with K-12 education and higher education in line for "substantial" cuts.

"It would be a pretty unbelievable amount of money to come out of those two," Fitzpatrick said.

But the standard deduction issue is "actually pretty simple," said Sen. Bill Eigel, R-Weldon Spring, who is planning to unveil a comprehensive tax reform bill.

Eigel says his bill would stave off the standard deduction threat by specifying its current level in statute. This effectively would decouple Missouri from the federal level and would require additional legislation to raise or lower the standard deduction in the future.

"That is much better than subjecting ourselves to the risk of basically whatever the federal government wants to do," Eigel said.

Even if Congress doesn't act and agree on a bill, Eigel says he'll file his legislation. His bill could include adjustments to the fuel tax, a reworking of the state's tax brackets, and other tax moves that could affect revenue.

"There's a real need for this kind of reform," he said.

Fizpatrick, the House budget chair, says he supports decoupling the standard deduction and Eigel's tax reform ideas in general — as long as it is "tweaked" to phase parts of it in over time.

"If we're not able to pass a broad tax reform package, we need to have on the table the possibility of decoupling," Fitzpatrick said. "... Ideally, I'd like to see Congress work on lowering the rates for everybody, as opposed to messing with the deduction."

Tax reform — the topic of Trump's speech in Springfield earlier this year — has been in focus in Missouri recently.

Earlier this year, Greitens put together a committee to examine Missouri's tax climate. The committee's final recommendations included scrapping several large tax credit programs, and the state low-income housing tax credit is already slated for cuts.

In a draft report, the committee was aware that "were Congress to enact President Trump's plan to increase the standard deduction, then Missouri could lose a significant amount of tax revenue" since the state relies on the federal system.

"However, if Missouri chooses to decouple from federal law, state revenues will no longer be dependent on federal tax reform," Greitens' tax study group said in its draft. "This may burden the taxpayer with additional work in order to file a return with Missouri."

Though decoupling would prevent Missouri's standard deduction to be hiked alongside a federal increase, the separation could also require the state to shell out for extra auditing.

"Currently, because Missouri can rely on the federal decision of adjusted gross income, there is not a need to conduct these kinds of audits," the committee said. "Yet, if Missouri were to break ties to federal law, individual audits would be necessary to ensure compliance. This would in turn cost the state for additional employees and training."

Eigel could submit his tax reform proposal as early as Dec. 1, the first day state lawmakers can pre-file legislation for 2018. The next regular legislative session is scheduled to begin Jan. 3.