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  • Writer's pictureAIM Team

Governor Parson signs landmark individual income tax reform

Governor Mike Parson has signed HB 2540, a bill that lowers the individual income tax rate in exchange for eliminating the federal income tax deduction for higher earners and limiting the business income deduction to 20% in the future.

The good news is the income tax rate will be cut for the 94% of Missouri businesses that report their business income taxes on their individual returns, and for all the other individual income taxpayers. The rate will actually be lowered by two different bills: the income tax reductions and business income deduction that were passed by then-Sen. Eric Schmitt (now State  Treasurer) and then-Rep. Andrew Koenig (now Missouri Senator) based on increases in state revenues, and the reductions in this bill.

The SB 509 cuts are only effective when the state general revenue increases by more than $150 million over the highest amount of such revenue in the previous three years. The first reduction of .1% (lowering the rate to 5.9%) occurred in the 2018 tax year and will be realized when 2018 returns are filed next year. The second step was triggered this week as revenues for FY 2018 were tallied. That will lower the rate another .1% to 5.8%.

The bill signed by Gov. Parson will lower that rate even more to 5.4% beginning in the 2019 tax year. All told, the income tax rate will have dropped 10% over a span of two tax years!

“These tax cuts, which we lobbied for, are advocated by Associated Industries of Missouri and our legislative leaders because they work,” said Ray McCarty, president of Associated Industries of Missouri. “Governor Mike Parson has now signed this landmark piece of legislation that lowers the tax rate more in a single year than ever in our history. The tax cuts that started this year were augmented by the federal tax cuts and the impact has been real. Tax revenue are growing despite the rate cuts,” he said.

The federal income tax deduction has long been protected by AIM because it primarily affects business owners, partners and shareholders in S corporations and other flow-through entities. The deduction is currently capped at $5,000 for individuals and $10,000 for combined returns. The federal tax cuts lowered the federal income tax liability of most taxpayers, reducing the value of the federal income tax deduction. Under the bill signed yesterday, the deduction will be phased out and will be zero for taxpayers with more than $125,000 in Missouri adjusted gross income.

Business taxpayers, however, will enjoy a business income deduction of 5% in 2018 and 10% in 2019. This was a major portion of the tax reform passed previously and an original idea that started with an AIM member company.

Taken altogether, this tax reform and the corporation income tax reform signed earlier this year by Governor Greitens, will be important and should help nearly all Missouri businesses.

AIM will continue to work on bills that help lower our tax liability in a responsible manner.



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