Proposed federal tax changes could mean $170M or more cut to Missouri state revenues

Yahoo

02-06-2025

Missouri Senate Appropriations Chairman Lincoln Hough, right, discusses a budget item May 8 with House Budget Committee Chairman Dirk Deaton during negotiations over the fiscal 2026 budget (Rudi Keller/Missouri Independent).
Along with hundreds of millions in potential new costs for Missouri taxpayers, an analysis of the budget bill backed by Congressional Republicans and President Donald Trump shows it would also cut state revenue as tax changes at the federal level are reflected in state returns.
Exactly how much is uncertain. The review by Jared Walczak, vice president of state projects at the conservative-leaning Tax Foundation, estimates it will be at least $170 million and could be as much as $429 million if state lawmakers pass tax cuts that mirror provisions in the legislation approved in the U.S. House.
Dylan Grundman O'Neill, senior state tax policy analyst at the left-leaning Institute on Taxation and Economic Policy, said Walczak's estimate is sound. O'Neill said he is working to estimate how much Missouri's revenues would be reduced further from the bill's increase in the limit on the itemized deduction for state and local taxes.
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The potential reduction in state revenue caused by federal changes, coupled with the new exemption for capital gains income and expanded property tax credit for some retirees and people with disabilities passed by the Missouri legislature earlier this year, could cause the coming fiscal year to be the fourth in a row where revenue growth does not keep up with inflation.
And the prospect that those federal tax changes and state tax cuts will put the squeeze on Missouri's budget hangs like a shadow over the legislature as it reconvenes this week to consider whether to set aside almost $1.4 billion in state taxes over the next 30 years to finance professional sports stadiums in Kansas City
'We know the state budget years ahead are going to be challenging, and the amount of general revenue that we have is something that I'm taking very seriously as a businessman, and what it's going to take in future years,' said Missouri Gov. Mike Kehoe.
The state budget for the coming fiscal year, awaiting action by Kehoe, would spend $15.8 billion in general revenue while collections are estimated at $13.6 billion. The budget's draw on the state's surplus and uncertainty about future collections is why a spending bill also on the special session agenda has only $50 million more in general revenue, Kehoe said last week.
Missouri's state income tax is linked to the federal tax system. The state tax form starts with the adjusted gross income calculated on the federal return and grants filers the same standard deduction.
The approximately 10% of taxpayers who itemize deductions are allowed to keep most of what they report to the IRS and add some deductions for Social Security and other payroll taxes.
The bill approved by the U.S. House includes a temporary $1,000 increase for the federal standard deduction, $15,000 for single filers this year. That would reduce Missouri revenue by about $124 million, Walczak said.
The new deduction for interest on motor vehicle loans would be added to the federal form in a way that reduces the adjusted gross income amount. That change is estimated to reduce state revenue by $46 million, he said.
'They're putting that above the line there,' he said. 'I don't understand why. I don't think anyone knows why they choose to do it this way.'
It would require action by state lawmakers to reverse the effect, Walczak said.
'A state could choose to have a modification where they add back the subtracted amount for auto loans, but they would have to choose to do that,' he said.
For most taxpayers, income derived from tips and overtime would be exempt from the income tax entirely. Like reversing the auto loan deduction, making Missouri law mirror that benefit would have to be done by the legislature, Walczak said.
The two exemptions would reduce Missouri state revenues by about $259 million.
'We put those numbers there because there are states that are saying that they want to follow the federal government and exempt tips and overtime,' he said. 'So we wanted to show what it would cost if they did that.'
The change in the $10,000 cap on the deduction for state and local taxes to $40,000 is one of the hardest pieces of the federal bill to estimate, O'Neill said.
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Before the cap was put in place by Congress in 2017, more than 30% of taxpayers itemized their deductions. When the standard deduction was doubled — and when mortgage loan rates were low — the rate of itemizers plummeted.
The deduction covers state and local income and property taxes. Missouri's current tax forms subtract state income tax payments from the amount claimed, for those under the cap, allowing the rest.
Itemizers who claim the maximum calculate the share of the tax payments that come from income tax, and subtraction a pro-rated amount from the $10,000 limit.
For example, the owner of a home in Columbia that the assessor appraises at $1.5 million pays just under $20,000 in property taxes. If income taxes are 90% of the total state and local taxes included on that person's federal form, the owner would retain a $1,000 deduction for their state return under current law.
With the cap increased to $40,000, the taxpayer would retain a $4,000 deduction. The net effect on state taxes would be a $141 cut for that taxpayer.
'The more the congressional bill raises that cap, the more relevant that provision becomes for states,' O'Neill said. 'Missouri is one of the states that has relatively high exposure to that change because of its rolling conformity to the federal tax code.'
The Institute on Taxation and Economic Policy estimates that Missouri taxpayers would see their federal tax bills drop by $9.1 billion, with more than one-fifth of that total going to the 1% of Missouri taxpayers who have an income greater than $689,300.
Filers in that group would receive an average tax cut of $58,490.
Taxpayers in the lowest 40% of filers would receive one-twentieth of the tax cuts under the bill.
The new costs imposed by the bill include a possible $400 million annually to maintain the food benefits program known as SNAP. Missouri would have to pick up an estimated 25% of the cost of providing the aid because Missouri's error rate on payments was 10% in 2023, which would mean the highest cost share.
Missouri will end the current fiscal year with an unobligated general revenue balance of $2.6 billion, the state budget office estimated when Kehoe's spending proposal was released in January.
Even after spending $1 billion of the accumulated balance, it is historically large and almost $900 million more than was predicted a year earlier. Two factors played into that increase — revenues in fiscal 2024 that were almost $300 million more than anticipated and a gap between budgeted amounts and actual costs, mainly due to understaffing.
Kehoe's January budget anticipates the surplus would fall to $1.4 billion by the end of the coming fiscal year in June 2026.
In the coming special session, Kehoe will be under pressure to allow more money to be spent in the appropriations bill.
'I don't believe that it's the government or the state's job to accumulate a billion dollars to look at in the bank,' said state Sen. Lincoln Hough, the Springfield Republican who chairs the Senate Appropriations Committee. 'I agree with a healthy reserve. I'm fine with that. But this billion and a half dollars that we have sitting in the bank while we've got hospitals that are closing down and child care facilities that need support… it's the whole list of projects.'
There should be some allowance for lawmakers to add items to the bill, he said.
'I'm not naive enough to think we're going to put together a $513 million capital improvements package and drop that,' Hough said.
The budget revenue estimate made in December anticipates a slight decline in revenue in the current year and a slight increase in the coming year.
That estimate was made before lawmakers passed the tax cut worth about $285 million in the coming year by official estimates but forecast to be much more by the Institute on Taxation and Economic Policy.
Missouri House Minority Leader Ashley Aune, a Kansas City Democrat, supports the legislation to keep the Chiefs and Royals in the state. She also said there should be more for the appropriations bill.
'We need to be concerned about where we're spending our dollars, but I also think that we have to be doing it responsibly,' Aune said.
But she is also concerned about the revenue impact of the federal budget bill and the tax cut awaiting action from Kehoe.
'We are in a position right now where we are seeing revenues dwindling,' Aune said. 'With everything that has been passed recently, it has the potential to put Missouri in a much more difficult position.'
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