JEFFERSON CITY — The former budget director for a Republican governor warned state representatives Wednesday that a proposal to eliminate the state income tax could "bankrupt" Missouri.
James Moody testified before the House Tax Reform Committee hearing on a proposal to replace the income tax with an increase in the sales tax.
"I think this has the potential to bankrupt the state," Moody said. "I think it has the potential to bankrupt the middle class, and if you're going to be doing that, you need to think long and hard about (the issue)."
Moody served as budget director in Gov. John Ashcroft's administration.
Business interest representatives joined Moody, who represented a group that opposes income tax repeal.
In addition to replacing the individual and corporate income tax with more sales tax, the proposal would get rid of the corporate and bank franchise taxes and eliminate most tax credits.
The legislature would be authorized to enact a sales tax at whatever rate that would be necessary to cover the income lost by repeal of the other taxes. The proposal provides that the replacement sales tax would include housing rent but exclude purchases for businesses, school tuition and motor vehicle sales.
Committee member Rep. Andrew Koenig, R-St. Louis County, sponsored the resolution. He said the sales tax increase would make the resolution's effects revenue-neutral, keeping the state's revenue intake the same while providing an opportunity for more economic growth.
"Taxes do damage to whatever the government is taxing," Koenig said. "The (resolution) would increase the economic well-being of the state and allow Missouri businesses to export goods without a Missouri corporate tax component."
The proposal also would allow the legislature to provide what effectively would be a rebate for the first $2,800 of sales taxes paid per person — a provision legislative staff estimate would cost the state $16.25 billion.
David Overfelt, president of the Missouri Retailers Association, said the implementation of the increased sales tax could cause sales and people to move across state borders.
"What we can see in this bill is a lot of sales shifting to Amazon, shifting to eBay and going across the border," Overfelt said. "A majority of the population lives on the border, and ... Kansas has done a very good job in getting the major retailers to come to their state."
Former small business owner Fred Berry voiced his support for removing the income tax and said the increased and expanded sales tax would instill a greater demand for economic development in the state.
"What we are trying to do is provide an economic future for Missourians and businesses in this state and make it attractive for businesses to move here," Berry said. "In other words, we're trying to become a strong state economically."
Rep. Chris Kelly, D-Columbia, who proposed another bill dealing with the income tax issue in January, said he would not take such a big step when altering the state's tax policy.
Kelly's proposal states that the income tax should be lowered and the sales tax expanded to include certain services, while Koenig's bill proposes to eliminate the income tax through a constitutional amendment.
"(Rep. Koenig) is articulating an important and worthwhile issue," Kelly said. "I don't believe that we can get there in one jump, and I think we ought to take little steps."
Although Kelly said he wishes to achieve a similar result as Koenig, Kelly also said this tax issue must be dealt with carefully. Instead of eliminating the income tax through a constitutional amendment, Kelly said he wants to deal with the issue in a statute so any mistakes can be vetted before the proposal is made permanent.
"There's a lot of unknowns, and those unknowns will make people apprehensive," Kelly said. "When you are writing big tax bills, such as this, you are certain to get things wrong ... ."