Gov. Mike Kehoe approved the tax cut expected to reduce revenues by $340 million annually even as he has been warning of future state funding shortfalls
BY: RUDI KELLER
Missouri Independent
Missouri investors will get a tax break when they take profits and motorists will pay more to renew vehicle registrations under separate bills signed Thursday by Gov. Mike Kehoe.
Kehoe’s signature on the bill granting an income tax exemption for long-term capital gains — profits on investments held for a year or longer — marks the third major tax cut in the past three years. And it comes just days after he vetoed more than $300 million in general revenue spending and restricted $211 million more amid worries about sluggish revenues.
In the fiscal year that ended June 30, the state took in $13.4 billion in general revenue and final figures show revenue increased just $1 million over the previous year. After Kehoe’s vetoes, the budget for the current fiscal year projects spending $15.5 billion in general revenue, with the gap between revenue and spending covered by surpluses accumulated in past years.
“Conservative leadership is about keeping more money in the hands of Missouri families, and less in government coffers,” Kehoe said in a news release.
The capital gains exemption for individuals is officially estimated to reduce revenue by about $110 million annually. Independent economists, however, have warned that the annual revenue loss could be much more, perhaps as much as $600 million.
Most of the benefits from a cut in the capital gains rate for individuals would go to a small slice of taxpayers. The 23,800 federal returns filed for 2022 with incomes greater than $500,000 a year represent 0.8% of all returns but included 65% of the capital gains income.
When Kehoe finished with the state budget, he warned he was making vetoes and restricting spending because of uncertainty in future state revenues and expenses.
When Kehoe released his budget proposal in January, it anticipated the state would end the current fiscal year with an unobligated general revenue balance of $2.6 billion. At that time, the unobligated surplus at the end of the coming fiscal year was projected at $1.4 billion, but during the recent special session state Budget Director Dan Haug told lawmakers he expects no more than half that amount — $600 million to $700 million — will remain on June 30, 2026.
“The Office of Administration’s Division of Budget and Planning estimates a nearly $1 billion shortfall in general revenue starting in (fiscal year 2027),” the release accompanying the budget actions stated. “Contributing to this shortfall, ongoing general revenue spending authorized in the (fiscal year 2026) budget is projected to outpace ongoing revenues by nearly over $1 billion and grow larger in future years.”
Both the vetoes and Haug’s forecast came before Congress finished work on the massive federal budget reconciliation bill signed July 4 by President Donald Trump. The conservative-leaning Tax Foundation estimated Missouri revenue would decline by at least $170 million and possibly by more than $400 million under an earlier version of the bill.
That estimate has not been updated since the final bill was passed.
The federal budget bill is also expected to shift billions of dollars in costs for programs like food stamps and Medicaid to Missouri over the coming decade.
The liberal Missouri Budget Project, which opposed the tax cut during the session, issued a statement Thursday condemning Kehoe’s decision to sign the bill.
“Prioritizing an expensive special interest tax giveaway at this time is irresponsible and a mismanagement of taxpayer dollars,” CEO Amy Blouin said in a news release. “It’s also a slap in the face to the bulk of Missouri taxpayers who are struggling to afford groceries and who already pay a higher portion of their income in state and local taxes than do the folks who will get a windfall from the capital gains exemption.”
A capital gains exemption for corporations, also included in the bill, would take effect when future revenue growth or legislative action reduces the top individual income tax rate to 4.5% or below. The rate this year is 4.7%, with two reductions of 0.1 percentage point each already included in state law when revenue triggers are met.
The state budget office estimates the earliest date for the next rate cut triggered by revenue would be Jan. 1, 2028.
Other tax cuts
The bill that includes the capital gains tax cut also includes provisions increasing a refundable income tax credit used by lower-income senior citizens and the disabled to offset property taxes. The increase in what is known as the Circuit Breaker tax credit would bump the maximum credit for homeowners to $1,550 from the current $1,100. Qualifying taxpayers who rent their homes would see their maximum credit increase to $1,055 from $750.
The maximum income for claiming the credit would also increase, to $38,200 for renters and $41,000 a year for homeowners.
The increased Circuit Breaker credit was negotiated by Democrats opposed to the capital gains cut. A bipartisan coalition also won sales tax exemptions for diapers and feminine hygiene products, bringing the total official estimate of the tax cut in the coming year to $430 million, with an ongoing revenue reduction of $340 million.
Registration fees
The Missouri Department of Revenue issues motor vehicle registrations and driver’s licenses through a system of contract offices that make money through fees, set by law, added to the state charge for the transaction.
There is supposed to be at least one license office in every county, but for much of this year, five counties have had no office because contractors wouldn’t work for the allowed fees.
The bill signed by Kehoe and sponsored by state Sen. Sandy Crawford, a Republican from Buffalo, would increase the fees received by the license offices by 50%.
The goal is to make the offices attractive to contractors and avoid closures, Crawford said during a House committee hearing in April.
“I live in a small town, and if my license bureau were to close, I would likely have to drive 45 minutes, take a half a day to drive and get my license,” Crawford said. “And so I would much rather pay $3 than take off half a day and drive 45 miles or 45 minutes to get this done.”
The transaction fee for a driver’s license or motor vehicle would go from $6 to $9 for the shortest period and from $12 to $18 for the longest, six years for a driver’s license and two years for a vehicle registration.
In fiscal 2024, the 175 license offices processed almost 9 million transactions and charged $58.4 million in fees.
The smallest, in Unionville in Putnam County on the Iowa border, generated $28,736 in fees on 4,519 transactions. There is currently no contractor for the Unionville office and it has been closed since mid-April.
The busiest license office is in Creve Coeur in St. Louis County, where 167,390 transactions generated almost $1.1 million in fee revenue.