This article first appeared in the St. Louis Beacon, May 8, 2013 - The Missouri House approved wide-reaching legislation cutting personal income, corporate and business taxes, sending the measure to Gov. Jay Nixon for consideration.
The House passed state Sen. Eric Schmitt's legislation, SB 253, Thursday by a vote of 103-51. That vote came a day after the Missouri Senate passed the bill by a vote of 24-9 and sent it to the House. Now Nixon will have to consider whether to sign or veto the bill.
While the bill managed to pass by a veto-proof majority in the Senate, it fell six votes short of that threshold in the House. Some Democrats want the governor to veto the bill, saying the tax cuts will force trims in state services.
The Senate-approved bill differs from an earlier version in that it does not call for an increase in the state sales tax -- which Nixon already had signaled he likely would veto.
Among other things, Schmitt's bill would gradually cut personal income taxes by a half of a point over the next 10 years.
If Congress passes legislation to encourage states to impose sales taxes on internet purchases, then the personal income tax rate would be lowered by an additional one-half of a percentage point.
The bill would also phase in over a five-year period a 50 percent deduction on business income on individual tax returns. It would also phase in a cut almost as large on corporate income taxes, by lowering the tax rate from 6.25 percent to 3.25 percent over a 10-year period.
"I think what have now is a fundamentally different bill," said Rep. Caleb Rowden, R-Columbia. "I felt I ran my campaign and won a tough race on a message of lower taxes. And on a message of a fair tax structure for all Missourians."
In an interview on Wednesday, Schmitt estimated that the bill would cost about $500 million a year once it goes fully into effect. Senate aides have estimated the loss to be roughly $570 million a year, while critics put the state's potential lost revenue at closer to $800 million a year, or more.
But Schmitt told the Beacon there's also a "fiscal note for inaction" to compete with states like Kansas, which has instituted in the past year a series of aggressive tax cuts for corporations and individuals. (Kansas has had to cut state spending dramatically as a result.)
"My belief is when these companies -- especially these smaller companies -- have more money, they invest that," Schmitt said. "The accountants who testified on this, they put their money back into their business. Whether it's hiring new people or buying new equipment. So I think you're going to grow the economy that way. I think that allowing individuals to keep more of their money expands the economy."
"The other truth is if we did nothing, if the state took no action, we're going to lose revenue to a state like Kansas or Oklahoma that have enacted these measures," he added. "Because I do believe if people can save 6 or 7 percent, they're going to make some rational economic decisions."
Cuts curtailed if state income drops
State Sen. Will Kraus, R-Lee's Summit, told the Beacon that the bill also includes "triggers" to slow down the implementation of the tax cuts if state income fails to increase.
Some of the tax cuts won't go into effect unless the "general revenue for the previous fiscal year exceeds the amount of general revenue in any of the three fiscal years by at least $100 million."
"What we did with the trigger is we wanted to make sure it didn't have a negative impact on state revenue," Kraus said. "In other words, we weren't going backward and to put some assurances to senators concerned about education funding and what not."
Kraus contended that if the bill attracts more people to live in the state, then it could improve Missouri's fiscal fortunes.
"If you look at other states, as income taxes are cut, revenue goes up," Kraus said. "What Kansas is trying to do is grow their tax base. So to increase revenue, they're growing the amount of people who are going to pay that income tax. So I believe we are falling behind. If you look at the state of Missouri, over the decade or the last century in fact, we've lost congressional seats. And it's because we're not keeping up with population growth."
"People are not coming to Missouri and living in Missouri," he added. "They go to other states. And those are the lower tax states."
But that argument wasn't shared by some Senate Democrats, including Senate Minority Leader Jolie Justus, D-Kansas City.
"When we are underfunding things like education and infrastructure, we do not need to be talking about further reducing taxes," Justus said. "The argument for reducing taxes is that it's going to be a stimulant on the economy and a job creator. In my opinion, we have cut taxes by over a billion dollars over the last 15 years. And if that's all it took to generate jobs and the economy, we'd be there already."
Some of those major moves, Justus said, included a 2007 tax cut on Social Security benefits and a phase out of the corporate franchise tax.
"The list goes on and on of all the places where we've cut taxes," Justus said. "What we need to be doing is staying competitive. But our taxes are already incredibly low. Our energy costs are low. Our business climate is good. All of those things are good. We don't need to match Kansas, especially when the path they're starting to go down is said to be one of the most dangerous."
Rep. Jon Carpenter, D-Kansas City, also expressed doubt that people would move to the state because of slight drop in personal income taxes.
"Does anybody in this body seriously think that there is anybody outside of the state of Missouri that are going to choose to move to Missouri, bring their family here and bring their business here because we lowered the top income rate from 6 percent to 5.5 percent?" Carpenter said. "Will literally one person make that decision? Will one person read the newspaper that the state decides to lower the tax from 6 percent to 5.5 percent and then decide to move here?"
"We don't get much benefit, but we've got a lot of costs," he added.
Estimates vary on impact to state's income
State Sen. Paul LeVota, D-Independence, estimated that the bill would actually cost the state about $800 million a year. The Missouri Budget Project sent out a press release Wednesday estimating that the bill could cost $850 million.
"When businesses decide where to locate and families where to live, they look at a state’s quality of life – things like schools, roads, and snow removal," said Budget Project spokeswoman Traci Gleason. "If Missouri really wants to compete, we must invest in what families and businesses need to thrive: strong schools and affordable, top-rate colleges to educate our children and provide a skilled workforce, quality transportation to get to school and work and bring companies’ products to market, and safe, stable communities."
And LeVota said there's "no plan to figure out a way to fund the things that are important to this state government."
"It just simply cuts and that's all it does," LeVota said.
But Kraus and Schmitt said that the bill is different from the policies that Kansas pursued.
"Kansas eliminated their [business tax deduction] all in one year and they cut their rates. We didn't do that," Kraus said. "We are doing it over a period of years and we're doing it more responsibly. So I don't think we're following Kansas. We're doing it through a different structure that I think is methodical, well-thought out way to move forward on tax policy."
Whether the bill will undergo changes in the Missouri House remains to be seen. But Justus and LeVota are banking on Nixon vetoing the measure.
"My hope is that the governor will veto it and it won't be overridden," LeVota said. "We'll have enough votes to sustain that veto. And we'll force the issue of talking about sound tax policy as opposed to something like this."
Added Justus: "Although I have no information one way or another, I hope that the governor will veto it."
While he also had no insight on how the governor may react to the bill, Kraus added, "The governor has the ability to look through the bill and make the decision on what he thinks is best for the state of Missouri. If he does veto it, we have the ability to come back during veto session and see if we can override that veto."
