Missouri Tax Reform Heightens Tax Competition on Nebraska’s Border

Missouri Tax Reform Heightens Tax Competition on Nebraska’s Border

Missouri Governor Mike Parsons signed a tax reform package into law on Wednesday, October 5th, improving Missouri’s individual income tax. Senate Bills 3 and 5 will advance the Show-Me State towards a lower, flatter income tax structure by enacting near-term rate cuts with more rate cuts scheduled for coming years. The tax cuts will result in increased tax competition along Nebraska’s eastern border, where a significant portion of the state’s population and economic activity are concentrated.

Although Nebraska made significant improvements to its income tax in 2022, no state can rest on its laurels, especially as tax competition accelerates around the Cornhusker State. Nebraska’s L.B. 873, enacted into law in 2022, will lower the state’s individual and corporate income tax rates over the next 5 years:

  • Nebraska’s top personal income tax rate will be reduced from 6.84% to 5.84% by 2027
  • Nebraska’s top corporate income tax rate will be reduced from 7.5% to 5.84% by 2027

Missouri’s new tax law will exempt the first $1000 of income from taxation, effectively removing Missouri’s 1.5% bracket. The top rate will be cut from 5.3% to 4.95% on January 1, and then will be reduced to 4.8%, 4.7%, 4.6% and 4.5% in coming years if certain revenue expectations are met, resulting in the following rate structure:

  • Missouri’s top personal income tax rate will be reduced from 5.3% to as low as 4.5% by 2027
  • Missouri’s flat corporate income tax rate will remain 4.0%

And Iowa’s 2022 tax reforms will make its individual income tax even more competitive than Missouri’s, while also resulting in a lower corporate rate than Nebraska’s

  • Iowa’s top personal income tax rate will be reduced from 8.53% to a flat 3.9% by 2026
  • Iowa’s corporate income tax rate will be consolidated and cut to a flat 5.5%

Unlike Iowa, Missouri did not fully flatten its individual income tax. However, Missouri’s (current) nine income tax brackets all kick-in on the first $9,000 of income, making its tax structure very similar to a flat income tax. The Show-Me State can achieve a low, flat income tax through improvements in coming years.

Furthermore, Missouri’s flat 4.0% corporate rate is one of the most competitive in the country. Gov. Parsons and Missouri lawmakers indicated that they are open to cutting Missouri’s corporate rate in future sessions. The only states that are scheduled have a more competitive corporate tax than Missouri are South Dakota and Wyoming, which don’t tax corporate income, and North Carolina, which is phasing out its corporate income tax over coming years.

Nebraska has been able to deliver tax reform in part because of its spending discipline. Spending growth has been limited to 2.8% annually under Governor Pete Ricketts, freeing up surplus revenues for tax rate reductions. Nebraska’s next governor should also embrace spending discipline, even under the condition of high inflation, so that Nebraska can accelerate its tax reforms and protect Nebraskans’ purchasing power.

Furthermore, Nebraska policymakers should look to broadly modernize the Cornhusker State’s tax structure across property, sales, and income taxes. Nebraska’s current structure was put in place generations ago, and the state would benefit from updating its tax base while also making Nebraska’s tax rates more competitive. We will explore what modernization means for property, sales, and income taxes in an upcoming series of blogs.

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