On the ballot for primary elections in Missouri on Tuesday, August 4, is proposed Missouri Constitutional Amendment 5. If Amendment 5 passes, the Missouri General Assembly will be authorized to gradually phase out the state’s individual income tax. The stated purpose of Amendment 5 is to make Missouri competitive with other states, especially neighboring Tennessee, for the attraction of new businesses.
If it passes, Amendment 5 will not automatically eliminate the state’s individual income tax. Rather, it will authorize the General Assembly to gradually phase out the state’s individual income tax, based on revenue growth, until the individual income tax is eliminated. Once eliminated, this amendment prohibits the General Assembly from ever again enacting an individual income tax.
Expansion of Sales and Use Tax
Amendment 5 will authorize the General Assembly to expand both state and local sales and use taxes. This expansion of sales and use tax is more than simply an increase in the tax rate. It will also allow the General Assembly to impose sales and use tax on services, which is currently prohibited by the state constitution. This expansion in sales and use tax will be “for the purpose of reducing and eliminating the state individual income tax and reducing local tax rates[.]” This means that the expansion of sales and use tax rates shall only be to increase the state’s general revenue for the purpose of eliminating the individual income tax. Therefore, this amendment will require the phasing out of individual income tax in any bill that expands sales and use tax.
Additionally, Missouri has some sales and use taxes imposed directly by its constitution, rather than by statute. In those cases, the General Assembly, under this new constitutional provision, is required to lower constitutionally imposed sales and use taxes to offset the increase in revenues generated from expanded statutory sales and use taxes. However, this provision will not affect the way sales tax is currently handled under Amendment XIV of the state Constitution regarding marijuana.
Proposed Lowering of Local Taxes
Most of the press surrounding Amendment 5 focuses on the elimination of the individual income tax. However, another requirement of this amendment is the dramatic lowering of local taxes. Once the General Assembly enacts an expanded sales and use tax, local governments are required to lower their local sales and use tax or property tax by at least 97% of the increased revenue seen from the General Assembly’s expansion of sales and use tax. If the local government chooses to lower its property tax rather than its local sales and use tax, it may lower the following types of property tax:
- personal property tax (generally motor vehicles);
- residential real estate tax; or
- all real estate tax if the local government does not distinguish between different types of real estate.
Additionally, for Kansas City and St. Louis, the only local governments with an “earnings” tax (a local income tax), the local government may choose to reduce the earnings tax rather than local sales and use or property taxes.
What this Means for Missouri Businesses
The potential legal issues presented by Amendment 5 for Missouri businesses could be a shift in the state’s current sales tax exemptions. While there are currently several specified exemptions to sales tax, some examples include materials purchased for manufacturing products to be sold and replacement parts and equipment for vehicles being used as common carriers.
Additionally, what is infrequently mentioned is that there can now be a sales tax on services, including professional services, previously not taxed. What this will mean for service-oriented businesses is yet to be seen, since this is only an option for the General Assembly. Another component infrequently mentioned by either proponents or opponents of Amendment 5 is that it will not mandate the phase-out of corporate income tax. Retaining the corporate income tax would be similar to neighboring Tennessee, which also imposes a corporate income tax while not imposing an individual income tax. However, because this constitutional amendment provides the tools for the elimination of individual income tax, the way in which it will be implemented and how it will affect Missouri businesses is a process that is yet to be determined.
GRSM will continue to monitor developments related to Amendment 5 and its implementation. For guidance on how these potential tax changes may impact your business, please contact the author or a member of GRSM’s Missouri team.