State auditor: Tax breaks, incentives may be jeopardizing Missouri's fiscal health

(From State Auditor Nicole Galloway)

As part of her Budget Integrity Series, Missouri State Auditor Nicole Galloway today released a report of the state's tax incentives and exemptions. The review included hundreds of tax breaks intended to spur economic activity in the state, but found the legislature lacks an accurate way to account for or track their fiscal impact.

"There's no system in place to determine whether taxpayers are getting promised economic benefits from special interest giveaways," Auditor Galloway said. "Unless the legislature does a better job assessing the costs and benefits of their policy decisions, the state will continue to jeopardize its fiscal health and threaten critical services for Missourians."

During the legislative process, bills receive a fiscal note, an estimate of the impact the proposed legislation will have on state funds. The report found that these cost estimates are sometimes formulated with out-of-date information and require much greater economic analysis than is currently performed. In addition, there is no follow-up process to evaluate the accuracy of the estimates and actual impact of new laws.

The report looked at a 2015 law that created a new method of allocating corporate income from interstate sales between states. The bill's fiscal note estimated the legislation would have a cost of $15.2 million each year. However, in the first two years since the law was implemented, corporate income tax collections have decreased by $177 million — five times the amount predicted in the fiscal note.

The audit also reviewed the discount offered to retailers in exchange for paying sales taxes on time. Missouri's discount is the second highest in the nation. A similar discount is offered to businesses that remit their employee withholding taxes on time, which is a discount only offered in Missouri. Over a two year period, these two discounts account for up to $282 million in taxes citizens paid, but are instead funneled to corporations.

"While Missourians absorbs dramatic restrictions on higher education funding and cuts to prescription drugs and in-home nursing care, the state is giving away millions to corporations for simply doing what the law requires," said Galloway. "Promoting a good business climate doesn't have to be at odds with protecting taxpayers."

The report also found that the state does not monitor the effect of sales tax exemptions, making it difficult to know the actual fiscal impact. Missouri has 209 sales tax exemptions for items like commercial laundries, fitness classes, and medical equipment. However, the Department of Revenue only tracks the specific impact of three individual exemptions.

The complete report is available here.