Show Me Savings: Missouri ends capital gains tax for individuals

Chad Perkins: New law will be shot in the arm for Missouri economy.

Kami Bailey: Missouri tax exemption may inspire similar action from other states.

Heather Rooney McBride: Law should attract investment, commerce and long-term residency to state.

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Missouri made history last month as the state became the first in the nation to enact a tax cut that exempts capital gains from income taxes.

House Bill 594, signed into law by Gov. Mike Kehoe in July, went into effect Aug. 28 and includes several tax provisions. Kehoe said at a July 28 Springfield Area Chamber of Commerce event that the legislation enacts the largest tax cut in state history. It allows individuals to deduct all capital gains taxes and corporate entities to deduct the total amount of their capital gains from their tax obligations each year when the top rate of corporate income tax is equal to or less than 4.5%.

The current top rate of tax imposed on individuals for the 2025 tax year is 4.7%. The earliest date for the next rate cut triggered by revenue would be the start of 2028, according to state budget office estimates.

The capital gains tax cut is retroactive to Jan. 1. It allows a state income tax deduction for gains on assets held for over a year. That includes capital gains, which are profits on investments such as stocks, bonds, real estate including homes and other assets.

State Rep. Chad Perkins, R-Bowling Green, who was elected late last year as speaker pro tem in the House of Representatives, was sponsor of HB 594. He said there was an identical bill in the Senate sponsored by Sen. Curtis Trent, R-Springfield, but added his legislation picked up more support in the House.

Perkins, who is in his fifth year in the House, said it’s not common for a bill to garner enough support to be passed so quickly.

“We were lucky enough to get this done in year number one; the governor signed it, and we really think it’s going to be a shot in the arm to the Missouri economy,” he said.

The Center on Budget and Policy Priorities, a Washington, D.C.-based research and policy institute, came out against the bill prior to Kehoe signing it into law, according to its website. It said most of the benefit will go to the wealthiest Missourians, who are far more likely to earn significant capital gains.

“Well, that’s not true,” Perkins argued. “The largest purchase that most people ever make is their home. I don’t think that anybody is worse off. I think that people from across the spectrum are better off because of it, regardless of their income.”

Kami Bailey, a partner at certified public accounting firm The Whitlock Co. LLP, said for those holding real estate for investment and selling it, those capital gains will now be excluded. She said that includes vacation properties, rental properties and flipped properties, in which investors buy, renovate and sell a house for a profit.

“For individuals that are mostly in Missouri or 100% in Missouri, it’s going to be a big tax savings, and it’s going to honestly make Missouri more competitive for people on the border of Kansas or moving over to kind of make that jump,” she said of tax-planning opportunities the exemption can open.

The law’s concept is to attract investment, commerce and long-term residency to Missouri, said Heather Rooney McBride, managing member and founder of law firm Rooney, McBride & Smith LLC. She said it likely will do so, as people will be more inclined to consider the state as an optimal location to reside and conduct business.

“For individuals who are full-time Missouri residents, the advice is relatively simple: Report all capital gains on your federal return as usual and subtract 100% of those gains from your Missouri adjusted gross income,” McBride said via email. “It is also important to remind clients that federal gains tax will still apply.”

Individuals will still owe taxes to the IRS based on their income and how long they held the asset. However, they no longer have to pay state income tax on those gains in Missouri.

Several other states have no capital gains taxes because they don’t levy any sort of state income tax. Those are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas and Wyoming, according to Washington, DC-based nonprofit think tank the Tax Foundation.

Fiscal focus
The bill’s updated fiscal note estimates the change could reduce state revenue in the first year by $157 million. In future years, the bill is estimated to decrease state revenue by roughly $111 million. However, the fiscal note indicates the impact could be significantly larger.

Based on the $13.3 billion in capital gains income Missouri taxpayers claimed for 2022 on their federal income tax forms, taking the 4.7% top rate would yield $625.6 million for fiscal 2026, according to the fiscal note.

But Perkins scoffs at the validity of the fiscal note, which he said are “always put together by bureaucrats.” It also doesn’t account for reinvestment activity, he said.

“That fiscal note never once began to consider the boom to Missouri’s economy,” Perkins said. “If you’re a Missourian who saves a little money on your home sale, what you’re going to do is reinvest that money and most likely into the purchase of another home. That fiscal note never takes that into consideration.”

In Missouri, about 542,000 individual income taxpayers reported capital gains in 2022, according to the Missouri Budget Project. The St. Louis-based nonprofit research group, which opposed the capital gains tax repeal, estimated that 80% of the tax relief would go to the wealthiest 5% of taxpayers.

“But the alternative view is that the law creates a rewards system for anyone, including but not limited to the wealthy, to invest in Missouri’s economy,” McBride said. “Investors and businesses generally choose to live and conduct business where it makes sense from a state law/tax perspective, and this law and capital gains tax elimination makes Missouri more attractive.”

Additionally, she said individuals who are forecast to benefit significantly from this law often give back to their communities in the form of charitable donations, sponsorships and participation in capital improvement projects. 

Bailey said she believes the capital gains tax exemption could spur more sales of businesses, many of which are set up as flow-through entities in Missouri. Those businesses pass income they make straight to their owners, shareholders or investors, according to the U.S. Chamber of Commerce.

Bailey estimates the tax exemption will be a dynamic change for a lot of her firm’s clients.

“If you’re looking at selling your business … you’re at maybe a 15% or 20% capital gain tax for the federal government, and then you have about almost a 5% capital gain tax for Missouri on top of that,” she said. “So that [exemption is] cutting 5% almost right off the bat.”

Following suit
Perkins said he hears people question sometimes why Missouri can’t have tax policy more like Texas or Florida, which are among those without an income tax. However, he said Missouri’s new tax exemption should make people in those states want to be more like the Show Me State.

Bailey agrees the policy could inspire similar action in other states.

“I definitely think it’s fair that Missouri could impact what other states are doing,” she said.

For McBride, the law likely will fuel a discussion about whether lower taxes result in realized investment opportunities and meaningful economic growth.

“Missouri has begun what I predict is going to be a heightened interstate competition to attract high-net-worth people to live in certain states,” she said. “It remains to be seen whether other states will follow Missouri’s lead on treatment of capital gains.”