JEFFERSON CITY — Abolishing the income tax and allowing the state to go into debt were two budget fixes proposed to a Senate panel Tuesday.
Five witnesses testified to the benefits and problems of eliminating Missouri income tax, currently the state's largest source of revenue. Lost revenue would be made up by increasing the state's sales tax rates — currently at 4.2 percent — to 5.1 to 7.6 percent.
Proponents of the idea told a Senate "seminar" organized by the chamber's Republican leadership that Missouri is losing industry to states that have lower income tax rates, and that a reliance on sales as opposed to income taxes would provide the state a more stable funding base.
"Missouri is falling behind its competitor states," said Joseph Haslag, the executive vice president of the Show-Me Institute, a St. Louis-based conservative think-tank that promotes free markets, according to its Web site.
Haslag's organization proposes raising the sales tax rate in Missouri to 5.1 percent. Initially, this increase might not be enough to offset lost money from income taxes, a hole that could be filled temporally if the state was willing to take on debt, Haslag said.
Arthur Laffer, an economist who served in the Reagan administration, said the nine states that do not have an income tax have seen significant economic growth over the last 10 years compared to the states with the five highest income tax rates.
Laffer said states with revenue sources based on sales tax also see less of a fluctuation in money collected during economic declines.
"It's basic economics here," Laffer said, referring to his state-by-state comparisons.
Disagreement came from Missouri Budget Project Director Amy Blouin, whose organization speaks about budget issues involving lower income Missourians.
Blouin said a comparison of all states that currently have an income tax — as opposed to the top five that Laffer used — shows no discernible difference in growth compared to those that do not have an income tax.
The proposed bill that would eliminate the state's income tax, House Joint Resolution 56, would also place a sales tax on items that other states without an income tax do not tax, Blouin said.
"No other state taxes services like this would," Blouin said.
In order to equal revenue lost from income tax payments, Blouin said the new state sales tax rate would have to be as high as 7.6 percent.
Former state budget director Jim Moody, now a lobbyist for various business and health interests, agreed that raising the sales tax rate to 5.1 percent would not generate enough money to offset losses from eliminating income taxes.
Health care services would have sales taxes attached to them under the proposed bill.
Using numbers Moody said he found on the Show-Me Institutes's Web site, he estimated that raising the rate to 5.1 percent would leave the state $1.3 billion short.
"Stop messing around with the tax system without adequate research and adequate knowledge," Moody said.
Senate President Pro Tem Charlie Shields, R-St. Joseph, said that the current budget situation requires lawmakers to think about budget options not normally considered.
"No sane person would design (the current) tax structure," Shields said in closing remarks to the Senate seminar session.