Envious of big tax cuts in neighboring Kansas, Missouri Republicans outlined ambitious plans Thursday to cut state income taxes in hopes of deterring businesses and residents in western Missouri from moving across the state line.
While business lobbyists praised the proposals, Democrats, budget analysts and a teachers' union representative all warned that Missouri may not want to be too much like Kansas, which now is grappling to fill a budget shortfall because of the tax cuts.
Income tax cuts are expected to be one of the marquee issues of Missouri's 2013 legislative session and also are on the agenda in neighboring Nebraska, Oklahoma and several other states with solid Republican majorities. Their model is Kansas, which effective this month reduced individual income taxes, increased standard deductions and exempted the owners of 191,000 partnerships, sole proprietorships and other businesses from income taxes.
"A response is warranted - not just because somebody else is doing it, because it's the right thing to do," state Sen. Eric Schmitt, R-St. Louis County, told colleagues on the Missouri Senate Ways and Means Committee.
State Sen. John Lamping said Missouri needs a comprehensive change to its tax policy that provides employers with more money to invest in their businesses and gives employees more money to spend on their families.
"Tax cuts need to be dramatic, they need to be perceived to be permanent, and then people respond to the change," said Lamping, R-St. Louis County.
The Senate panel heard testimony Wednesday on three tax-cut proposals.
• Senate Bill 11, by Schmitt, would gradually cut the state's corporate income tax in half over the next five years. It also would phase in a 50 percent deduction for business expenses on individual income taxes, which is intended to benefit smaller businesses that aren't structured as corporations. When fully implemented, the bill is projected to cut state tax revenues by $351 million annually.
• Senate Bill 26, by committee chairman Sen. Will Kraus, R-Lee's Summit, would lower Missouri's top individual income tax rate to 5 percent instead of the current 6 percent. The legislation also would phase in a 25 percent business income deduction on individual income taxes over the next five years, and would cut the corporate income tax rate nearly in half over the next three years. The bill is projected to cut taxes by $946 million annually when fully phased in.
• Senate Bill 31, by Lamping, would set a standard 4 percent state income tax rate beginning in 2014 - amounting to a tax hike for the poor but a cut for the middle class and wealthy. The bill also would raise the state's cigarette tax by 23 cents per pack and impose a half-cent sales tax dedicated to rebuilding Interstate 70. The income tax cut would be significantly larger than the tax increases, resulting in a net projected tax cut of $1.1 billion annually.
The committee plans to hear additional public testimony about Missouri's tax policies next week.
The Kansas tax cuts have contributed to a projected $267 million budget shortfall for the fiscal year beginning in July. Kansas Gov. Sam Brownback, a Republican, has proposed generating state revenues by eliminating income tax deductions for the mortgage interest and property taxes paid by Kansas homeowners. He also wants to cancel the scheduled expiration of a temporary sales tax increase.
But even as Brownback attempts to balance the budget, he is proposing additional income tax cuts for the future, with a goal of eventually eliminating the state's individual income tax.
During the Missouri Senate hearing, some Democratic lawmakers questioned the wisdom of emulating Kansas.
"If we're going to look at Kansas, they're not doing good. They have cut, and they can't fund their schools now," said Missouri state Sen. Paul LeVota, who lives in Independence, but works in Lenexa, Kan.
Jim Moody, a former Missouri budget director who now is a consultant and lobbyist, said Missouri already has reduced its taxes by nearly $1 billion over the past 15 years. He said Brownback's latest tax-cut plans for Kansas could jeopardize government services.
Moody and Democratic lawmakers suggested Missouri should wait to see the effect of the Kansas tax cuts. But some business lobbyists suggested Missouri must strike quickly to avoid an economic defeat in the long-running battle for businesses between the two states.
"What Kansas did really was a shot through the heart to Missouri," said Ray McCarty, president of Associated Industries of Missouri.