Show-Me: Turning Dreams of Growth Into Reality

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When you consider how Missouri has failed to keep up with states like Florida and Texas in economic and population growth, the reasons may seem obvious. We didn’t get the sandy beaches and warm weather that Florida and Texas got, not to mention Texas’s fossil fuel reserves. But that explanation isn’t good enough. It doesn’t account for another state that is leaving Missouri in the dust: Tennessee, the state I grew up in.

Tennessee and Missouri have a lot more in common other than our shared love for blues and barbeque: Both states are landlocked and have little or no fossil fuel production, similar spacing between their large cities, similar demographics (race and urbanicity), beautiful landscapes and tourist destinations, and much more. However, there are also some key differences—one of which manifests itself in the form of heart-shattering pain every time I go to a Missouri restaurant and ask for a sweet tea (alas, they never seem to have it). But Missouri’s use of a state income tax is more relevant here. 

All the way back in 2009, the Show-Me Institute released a case study pondering the question of whether or not Tennessee’s tax policy had allowed it to catch up with Missouri in economic and population growth. In 1917, Missouri implemented a state income tax—at a flat rate of 0.5%. In 1931, it became a graduated tax, with those in the highest income group subject to a 4% rate, and then finally, in 1971, the rate for the highest income group rose to 6%, where it remained until recent years. Additionally, Missouri’s two largest cities (St. Louis and Kansas City) implemented earnings taxes in 1954 and 1964. All the while, Tennessee remained one of the few states that operated without a traditional state income tax, nor did its largest cities impose an earnings tax. Tennessee, since the Civil War, had been far behind Missouri, but began slowly catching up in the 1930s and was narrowing the gap much more quickly beginning in the 1960s. Back in 1965, Missouri had approximately 700,000 more people than Tennessee and a 31% higher GDP. By the early 2000s, Tennessee had caught up to Missouri in both population and GDP. How did it happen?

Tax policy seems like a very plausible explanation. In 2008, Tennessee received 74.6% of its tax collections from sales and gross receipts taxes, compared to 43.5% for Missouri. On the other hand, Tennessee collected just 2.5% of its tax revenue from its individual income tax, while Missouri relied on individual income taxes for 46.7% of its collections. Fast forward to 2023, when Tennessee received 75.1% of its collections from sales and gross receipts taxes—compared to 42.4% in Missouri. Additionally, Tennessee collected 0% of its taxes from an individual income tax, while Missouri relied on it for 43.8% of its collections. 

With so many other similarities, the 2009 report argues that large difference in income tax reliance may have been a driving factor in Tennessee catching up. Sales taxes are better to rely on as they do not disincentivize work, they are a stable revenue source less prone to economic downturns, and individuals can better control how they are affected by them. If a family needs to do some temporary belt-tightening, they can avoid the weight of the sales tax by cutting back on consumption in the short run. But there’s no avoiding an income tax unless you work less or leave the state.

In the years since the report came out, Tennessee has continued to outgrow us—there are now over 900,000 more residents there than in Missouri, and as of 2023, Tennessee’s GDP was 24% higher than ours. Interestingly, Tennessee only had a 14% higher GDP in 2017—in recent years, the Volunteer State has grown tremendously.

Part of Tennessee’s recent success could have come from the 2016 elimination of the last vestige of Tennessee’s income tax, the Hall Tax (which taxed income from stocks and bonds). In fact, Tennessee was the second state in history (following Alaska) to eliminate or phase out its income tax—which is different from other states like Florida and Texas, which never had one to begin with.

Missouri has made modest progress toward phasing out its state income tax in recent years, but we cannot be content until that number hits zero.

Tennessee’s advantages seem to go beyond tax policy. The Fraser Institute issues a periodic ranking of states according to “economic freedom.” According to its 2021 ranking, Tennessee came in third—right ahead of #4 Texas, but behind #1 New Hampshire and #2 Florida. Missouri came in at a respectable, but distant, #15 ranking (the difference in score between #4 Texas and #15 Missouri is approximately the same as the difference between Missouri and #35 Mississippi). Among the “least economically free” states in this report (New York, California, Illinois, West Virginia, and New Mexico), almost all of them saw population loss in their state.

In 2023, an estimated 86 people per day were moving into the Nashville area (which does not have an earnings tax)—down slightly from the 96 per day in 2022. Over the past decade, the average annual population growth rate in the Nashville and Knoxville (where I am from) metro areas has been over 2%—much higher than the St. Louis and Kansas City metro areas (with Memphis growing slower than Kansas City but faster than St. Louis). Tennessee is surging, and unsurprisingly, has ranked in the top six in each of the past three years in the U-Haul Growth Index (still trailing Texas and Florida). Missouri has floated around from #39, to #15, to #28 in the last three years’ rankings.

Not only are individuals relocating to Tennessee, but businesses are, too. In a study conducted by the Hoover Institute, Tennessee received the second-most businesses relocating from California (with Texas firmly holding the top spot).

Tennessee, right on Missouri’s border and with so much in common with us, is doing things the right way. They’re eliminating taxes that hamper growth, they have had two governors in a row who made education reform to increase school choice and accountability their top priority, and they are embracing its identity as a pro-growth, freedom-loving state.

Becoming a nationwide leader in growth does not have to be a distant dream for Missourians. It doesn’t even require new ideas. We can follow the example being set right next door. 

We can move toward realizing a “Tennessee Dream” in two ways. First, by ensuring that every restaurant is stocked with sweet tea that would earn my grandma’s coveted seal of approval. Second, and more seriously, by enacting reforms that make Missouri a more attractive place to live, work, and start a business—all of which could be jumpstarted by phasing out the state-income tax entirely in the years ahead.

Avery Frank is a policy analyst at the Show-Me Institute, which promotes market solutions for Missouri public policy.