Popular Missouri income tax deduction will probably double next year

Lawmakers in Jefferson City driving discussion about state-level tax reform are on board with allowing Congress to increase one of Missouri's most popular tax deductions by nearly double its current amount.

When Republicans in Washington, D.C., pushed through the Tax Cuts and Jobs Act in late 2017, they affected Missouri because of how our state law is written. There are statutory connections between the federal and state standard deductions and personal exemptions, two of the more popular tax breaks Missourians claim each year.

With President Donald Trump's signature, the U.S. standard deduction roughly doubled and the personal exemption was eliminated. Taxpayers will not be affected by the changing deduction until they file their taxes next year on the money they make in 2018.

Missouri lawmakers are on track to preserve the link between the federal and state standard deductions. State statute is clear: "The Missouri standard deduction shall be the allowable federal standard deduction."

Researchers at the Economic & Policy Analysis Research Center, a University of Missouri-linked group that has Gov. Eric Greitens' ear, have already noted the standard deduction link, which has the effect of allowing Missourians filing their taxes next year to claim a deduction almost twice as large as they will this year on both their state and local taxes.

That's several thousand dollars more that Uncle Sam (and Uncle Jeff) can't consider taxable income, meaning many Missourians will pay less in taxes.

But, as the university researchers noted, "by itself, the federal change in the standard deduction would have a huge deleterious impact on Missouri state revenues."

Specifically, looking at a standard deduction increase in isolation, researchers projected a reduction of several hundred million dollars; the latest figure for this change alone was a reduction of about $637 million to state revenue.

That would mean a cut of more than 6 percent to discretionary spending and a reduction of about 2 percent to the state's $28.8 billion budget overall.

"However," noted Joel Walters, director of the Department of Revenue, "there are numerous interactions between all of the changes and a number of the provisions move state revenue in opposite directions, the net of which was determined to be minus $58 million."

Ending the standard deduction link would be relatively easy for lawmakers.

In fact, decoupling language was included in an early draft of tax reform legislation filed by Sen. Bill Eigel, who needed fewer than 100 words to unlink Missouri's standard deduction in statute.

Eigel, R-Weldon Spring, proposed a fixed standard deduction with no adjustment for inflation; lawmakers could have changed it in the future if they wished.

That language is no longer in Eigel's legislation, which has been joined with two other Republican senators' bills.

"When we were looking at the overall pH of the bill, we wanted to make sure that we were at revenue neutrality," Eigel said. "We've been able to accomplish that without having the decoupling language in there, so that was the route we decided to go."

Eigel noted that because the state and federal link was automatic, Missouri's standard deduction for the next tax year (not the taxes that are due this April) has already changed to match the federal deduction.

Rep. Elijah Haahr, R-Springfield, is piloting the House's tax reform efforts and also supports allowing the state standard deduction to follow the federal code.

"When we set out to do tax reform, I wanted to make sure we were maximizing the benefit to Missourians and simplifying our tax code," Haahr said. "Decoupling would not only add a layer of complexity to an already complicated system but would also reduce some of the benefit taxpayers would see under the recent federal cuts."

The federal tax bill also eliminated the federal personal exemption, but because of the way state law is written, experts disagreed on whether Missouri would still have a personal exemption going forward. The Department of Revenue is working under the assumption that the Missouri personal exemption is likewise removed.

Haahr and Eigel have both proposed language to specifically cancel the personal exemption at the state level after the current year.

Greitens' spokesman, Parker Briden, did not respond to a message asking whether the Republican governor had an opinion on decoupling the state's standard deduction or changing Missouri's personal exemption.

More: Missouri thinks a popular tax deduction has been eliminated. Analysts aren't so sure.

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