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Tax Credits

March 29, 2021
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WRITTEN BY Dr. Brittany Whitley and Dr. Jill Barnas

Federal, state and local tax revenue fund a range of public goods and services, including education, healthcare, and infrastructure. Policies that reduce the amount of taxes owed by a taxpayer (e.g., credits, deductions, exemptions) are expected to decrease government revenue while incentivizing immediate private spending and investment. In contrast to tax deductions and exemptions, which reduce the assessed tax liability, tax credits are directly subtracted from the amount of taxes owed. In many cases, tax credits are targeted to low- and middle-income individuals and households. They can also be used to incentivize taxpayers to invest in high-need projects, government programs, or philanthropic services. Eligible Missouri taxpayers may access tax credits related to property (e.g., Missouri Property Tax Credit), individual income (e.g., Federal Earned Income Tax Credit) and/or corporate income (e.g. Missouri Meat Processing Facility Investment Tax Credit). Several proposed bills during the 2021 session would increase the availability of tax credits in each of these areas, although the estimated impact of each credit will vary based on affected population, whether the credit impacts state or local tax revenue, and the maximum value of tax credits that can be awarded.

Highlights

  • Many tax credits are designed to target tax relief to specific individuals, such as seniors or low-income taxpayers with dependents. Circuit breaker tax credits and refundable tax credits preferentially aid low-income individuals.
  • Tax credits can also be used to incentivize individuals or businesses to invest in high-need projects or philanthropic causes.
  • A significant portion of state-generated revenue depends on income tax collection. Local governments, however, rely more heavily on property taxes.
  • Residential and commercial property tax credits offset costs for homeowners, renters and businesses, but decrease the available funding for public services that depend heavily on locally-generated revenue (e.g., education, public safety).
  • Income tax credits are typically used to incentivize economic development and charitable donations by reducing the income tax liability of eligible individuals and businesses and the funds available for federal/state budgets.

Limitations

  • There is continued debate over the extent to which tax incentives such as tax credits stimulate the economy. The relative costs and benefits are also influenced by the time frame considered (e.g., short-term spending increases vs. long-term revenue reduction).
  • Because estimates rely on averages (e.g., average income, average property value) and often lack specificity about the regional distribution of qualified individuals, it is difficult to estimate the extent to which specific tax credits will impact state/local revenue.
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