State auditor warning: Missouri budget balanced on backs of taxpayers, financial instability could force deep cuts

(From State Auditor Nicole Galloway)

Missouri State Auditor Nicole Galloway today released a report that finds individual taxpayers are on the hook more than ever to fund government, creating increasing budget instability as the state struggles to meet its obligations, including paying tax returns on time. These realities, along with years of policy decisions based on unrealistic expectations, have left the state unprepared for an economic downturn and facing steep cuts to critical services.

"I hear from taxpayers throughout the state who want quality schools for their children, safe roads and bridges, and affordable higher education," Auditor Galloway said. "Budgeting requires the courage of common sense. The legislature and the Governor need to be honest with Missourians on how decisions in Jefferson City affect citizens' daily lives."

The report provides an analysis of policy and economic factors that could grow the state out of a financial crisis. For example, in order to generate $500 million in revenue, the state would need to add approximately 168,000 new jobs paying the state's average wage. It took seven years to add that many jobs during a recent period of record growth, meaning Missouri would need to see its largest increase in jobs in state history. The state would also need more jobs than unemployed citizens; there were 116,000 unemployed workers in the state's workforce as of September 2017.

If average wages increased by $1 an hour — which would mean higher pay than any other time in Missouri's history — it would still not generate enough new revenue to address the shortfall. The report found that, despite record low unemployment and policies aimed at attracting businesses, Missouri has not experienced the same level of economic growth as other states in the nation in recent years.

The state increasingly relies on individual income tax revenue, which now comprises almost 70 percent of general revenue. Missourians are already feeling the consequences of the Governor's reductions to higher education funding and cuts to prescription drugs and in-home nursing care. Missourians are also carrying a greater burden at the local level. For example, 68 percent of local school districts have seen an increase in reliance on local funding over the past 10 years, mostly due to increases in property taxes. Families sending children to college have seen tuition and fees increase 25 percent over a six-year period.

"Today more than ever, individual taxpayers are left footing the bill for government," Auditor Galloway said. "Policymakers in Jefferson City talk a lot about lowering the tax burden on Missouri families. The reality is a family of four is paying higher property tax rates to support their kids' schools, shelling out higher sales taxes on their newborn's diapers, and having more difficult conversations around the dinner table about how to pay for their teenager's college tuition."

When the legislature passed new tax policies in recent years, taxpayers were promised economic growth that would lead to more investment in critical services and programs. Individual Missourians are not realizing those benefits, Auditor Galloway said. For example, 0.1 percent decrease in individual tax rates passed by the legislature in 2014 would generate a small uptick in economic activity, but cannot offset the loss in revenue due to numerous giveaways, incentives and exemptions in the current tax code.

The report also found the budget cannot withstand increases in unemployment. If unemployment in Missouri reached the same rate as it did in 2009, during the recession, the state would experience an estimated $600 million revenue reduction. Due to the state's current reliance on borrowing, reserve funds might not be readily available to fill the budget hole. The result would be significant budget cuts and ongoing delays in issuing income tax refunds to taxpayers.

Over the past year, Auditor Galloway has released a series of reports as part of the Budget Integrity Series outlining the impact of policy decisions affecting the state's finances. These reports include analyses of state sales tax exemptions, elementary education funding, timeliness of tax refunds and state legal expenses.

In order to assess the impacts of stressors on the state's economy, the State Auditor's Office contracted with economists from the University of Central Missouri to develop an economic forecasting model. The tool, which uses historical economic trends to estimate impacts on the state's finances, is available online at auditor.mo.gov.

The full report is available here.