The federal tax cut will reduce Missouri revenue by a modest amount because the two biggest changes almost cancel each other, according to Joseph Haslag, a University of Missouri economist who helps state government project tax receipts.

In an interview Tuesday, Haslag said the Economic and Policy Analysis Research Center would issue a report later this week explaining the estimate that the tax cut will reduce state revenue by about $58 million. Haslag, who holds the Kenneth Lay Chair in Economics, is the executive director of the research center.

The increased standard deduction, which by state law is also applied to Missouri income tax returns, if it was the only change would cut state revenue by $565 million, Haslag said. But the provision eliminating the personal exemption, allowed in Missouri law only if a personal exemption is allowed on the federal return, adds back about $440 million, he said.

The estimate is based on the data from tax returns filed in 2016 and only looks at the impact of the individual income tax changes on that information, he said.

“This is just a simulation model that computes the immediate impact,” Haslag said. “Basically it is a tax calculator.”

The findings will be part of the estimate for overall changes in Missouri revenue that will guide Gov. Eric Greitens and lawmakers as they prepare a budget for the year beginning July 1. Along with the federal tax changes, a state tax cut will take effect Jan. 1, dropping the top rate to 5.9 percent and exempting 5 percent of “pass-through” business income from taxation.

This year’s budget was based on estimates made in December 2016 of general revenue collections of $9.4 billion, a growth rate of 3.8 percent. That estimate will be adjusted at the same time the estimate for the coming year is announced.

“We’re doing the best we can,” Haslag said. “This is a complicated bill on the individual income tax. That is part of why this has taken so long.”

The projected loss of revenue is about 0.6 percent of the general revenue fund, a modest amount compared to recent year-to-year changes in revenue that have ranged from a high of 10.1 percent growth in fiscal 2013 to a low of a 1 percent decline in fiscal 2014.

It is not an insignificant amount of money, Haslag said.

"I know $58 million is important for people relying on roads to be built and some of the other services," he said.

The loss of about $60 million is a manageable figure, said House Budget Committee Chairman Scott Fitzpatrick, R-Shell Knob.

"We will be planning on a $60 million reduction from the tax bill and that is what we will budget for, but hopefully we will not see that reduction," Fitzpatrick said.

The revenue loss could be made up by increased economic activity but that possibility can't be used to determine the budget, he said.

The consensus revenue estimate, which will form the basis of decisions by Greitens and lawmakers, will be ready later this week after Haslag publishes his report and a few other minor points are determined, Fitzpatrick said.

The modest impact means there is no pressure on lawmakers to change state tax law to make up the loss, he said.

"I don’t think we necessarily need to do something to react to what (Congress) did," he said. "But I think there are some positive things we could do."

Senate Appropriations Committee Chairman Dan Brown, R-Rolla, did not return a call seeking comment. State budget director Dan Haug was not available.

The report didn’t attempt to estimate the impact of the tax cut on corporate tax collections in Missouri, Haslag said. The research center has a model for the interplay between federal and state taxes on corporations, but Haslag said he lacks confidence in the result because there were so many changes in the corporate tax rules.

Individual income taxes are estimated to bring $7.8 billion to the state treasury in the current fiscal year. Corporate income taxes account for $377.5 million in general revenue.

Missouri ties its individual income tax to the federal system in several ways. A taxpayer’s adjusted gross income on the federal form is used on the state form. If a taxpayer itemizes deductions at the federal level, they may use most of the same deductions on their state return. The most significant exception is that the federal deduction for state and local taxes is not allowed on the Missouri return. Instead, Missouri allows a deduction for federal taxes paid.

The new federal tax law caps the deduction for state and local taxes at $10,000. Missouri limits the deduction for federal taxes to $5,000 on a single return and $10,000 on a combined return for married couples.

Most of the other changes in state revenue will affect taxpayers below or near the cap for deducting federal taxes, he said. If there were no cap on the state deduction for federal taxes, the impacts would be far larger, Haslag said.

Lower federal tax rates mean a smaller tax liability and a smaller deduction. That will increase state revenue by about $140 million, he said. A larger child credit also reduces federal liability, adding perhaps $17 million to state coffers.

The larger deduction allowed for medical expenses will reduce state revenues by about $36 million, Haslag estimated.

When the report is issued, it will include a cautionary note that it does not attempt to estimate economic changes that the bill could produce, Haslag said.

“This is not going to take into account any growth impacts or changes in people’s behavior,” Haslag said.

rkeller@columbiatribune.com

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