Officials: Tax code lags state’s economy

The loss of jobs in manufacturing has resulted in the loss of tax revenues.
Monday, November 10, 2003 | 12:00 a.m. CST; updated 2:06 p.m. CDT, Sunday, July 6, 2008

JEFFERSON CITY — As Missouri’s economy has evolved, its tax laws have not, resulting in businesses that operate under the tax radar while state coffers remain dry, State Revenue Director Carol Fisher said.

Missouri’s economy has shifted gradually from being based on manufacturing goods to providing services. The state tax code was last updated in the 1970s. Since then, the economy has shifted toward services, while the tax structure has lagged behind, Fisher said.

“We just have not kept up with the economy,” House Tax Policy Committee Chairman Shannon Cooper said. “We’re way behind.”

Legislators and business owners are also questioning whether the state needs to expand its tax laws to include services.

Tax laws rely on manufacturers to earn revenue for the state. As these industrial firms leave, state funds leave with them. In place of these goods-based companies, services such as insurance and medical care have increasingly fueled Missouri’s economy. Now, 80 percent of the state’s economy is based on services, Fisher said.

According to the Missouri Department of Economic Development, Missourians lost more than 18,000 jobs in the manufacturing and trade industries between May 2002 and May 2003. Meanwhile, job growth has been restricted to the fields of financial activities, education, health and other services.

Columbia has seen the effect of the state’s economic reorientation. Manufacturer 3M is laying off more than 120 employees. The city’s employment bedrock consists of MU, three hospitals and insurance agencies, such as Shelter and State Farm, all service industries.

To combat the problem, Fisher has called for a sales tax on services; however, the Department of Revenue is not recommending any particular services to be taxed, she said.

Missouri’s sales tax is based on the sale of goods. However, Missourians are not buying goods as much as medical treatment and accounting services, Fisher said.

Many of the nontaxed services are created by technologies that move faster than tax legislation.

“Laws have not been updated to account for the changes that technology has made possible,” Fisher said.

The Internet, for example, was not a source of revenue when Missouri’s sales tax laws were written, Fisher said. Therefore, services that the Internet provides, such as downloading software and music, go untaxed, Fisher said.

The state’s Joint Committee on Tax Policy was established to address the changing economy and investigate the government’s role in it. The committee, consisting of Missouri senators and representatives, studies Missouri’s tax laws, listens to testimony from state officials and interest groups about the effects and shortcomings of Missouri tax policy. It also examines the ways other states have reoriented their tax policy around services.

The committee has discussed tax rates on labor at accounting, legal and architectural services, Fisher said.

Fisher offers the example of automobile repairs to understand the difference in taxation, she said. Parts and labor are separated on the bill and only the parts, the tangible property, are taxed, she said.

If services pick up part of the tax burden, rates would fall for current revenue sources such as manufacturers and citizens, Fisher said.

Some business owners disagree that issuing new taxes is the answer.

Bob Buchheit of Bob’s Auto Service said: “I don’t know (that) I’ve ever seen the government remove a tax that is already in place. Anytime you increase the dollar amount to the consumer, it’s going to have a negative effect (on business).”

Creating taxes would also be costly to consumers, John Becker of Boone Accounting and Tax Services said.

New taxes also bring new costs as the state works to collect, Becker said.

“Now you’ve got to keep track of all those transactions,” Becker said. “All of this takes time, and time is money.”

Political differences among committee members and other legislators might make such concerns inconsequential. The political climate must be considered before any changes can be made, said Sen. Ken Jacob, D-Columbia, who is a member of the tax committee.

Both Republicans and Democrats have been reluctant to acknowledge that the state needs to tax service industries, Jacob said.

“There has to be an acceptance that there is a problem before we can decide what can be done,” Jacob said. “I don’t think there is a general consensus that there is a problem.”

Until there is agreement, “nothing can happen,” Jacob said.

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