A Missouri Legislator Takes On A Costly Loophole

Missourians can write off up to $5,000 in federal income taxes paid ($10,000 for married couples) on their state income taxes. Missouri is one of only six states that offer this deduction and it cost the state about $400 million in 2011. Calling it a “costly tax code luxury that produces no noticeable public benefit,” the St. Louis Post Dispatch blasted the deduction in an editorial today.

The editors also note that State Representative Jeanette Mott-Oxford recently offered an amendment to House Bill 1661 which would eliminate the deduction entirely, and that her legislation would significantly offset a crippling budget deficit which is projected to exceed $500 million next year.

In the House floor debate over her amendment, Representative Mott-Oxford cited the Institute on Taxation and Economic Policy’s Topsy Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head. This 2011 report found that 83 percent of the benefit of the deduction goes to the top 40 percent of taxpayers in Missouri while those in the bottom 20 percent receive zero benefit from it.

In spite of its $5,000 cap (which makes Missouri’s deduction somewhat less irrational than other states’), treating federal income taxes as a deductible expense is costing the state eight percent of its income tax revenues and the figure will rise if federal income taxes on the wealthiest filers also rise, according to ITEP’s study.

Her legislation faces a daunting political gauntlet it’s not likely to survive, but Missourians should thank Rep. Mott-Oxford for pushing them closer to the day when this loophole is finally eliminated.