Mo. Gov. Nixon vetoes income tax cut legislation

By DAVID A. LIEB

Associated Press

JEFFERSON CITY, Mo. (AP) — Gov. Jay Nixon vetoed legislation Wednesday that would have cut Missouri’s income tax rate for the first time in more than 90 years yet also could have forced an apparently unintended hike of taxes on prescription medicines.

The income-tax cut was one of the top priorities of Missouri’s Republican-led Legislature and would have been one of the state’s most aggressive volleys in an ongoing battle to attract businesses against its tax-cutting neighbors to the west.

Republicans could consider a veto override in September. But to be successful, they would need the votes of every Republican in the House, or else would have to pick up support from some of Nixon’s fellow Democrats.

The Missouri legislation sought to provide tax relief to small businesses by phasing in a 50 percent deduction over five years for business income reported on individual income tax returns. It also would have gradually cut Missouri’s corporate income tax rate nearly in half and lowered the top tax rate for individuals from 6 percent to 5.5 percent over the next decade.

Though it would have been Missouri’s first income tax rate reduction since 1921, the measure still was less sweeping than an income tax cut passed last year in Kansas that created a hole in the state budget.

Missouri lawmakers had sought to partially safeguard the state’s finances by making the rate reductions for corporate and individual taxes effective only if state revenues grew by at least $100 million annually over their high-point from the previous three years.

But Nixon raised concerns that the tax cut could nonetheless jeopardize funding for education, mental health and other essential services. He indicated on May 10 that he likely would veto the legislation. At the time, legislative researchers had projected the measure to reduce state revenues by about $700 million annually once fully phased in.

Last week, Nixon raised an additional concern about the legislation. He said a routine bill review by his staff discovered wording that would repeal an existing sales tax exemption for prescription drugs, potentially costing consumers more than $200 million annually. Republican legislators described it as a technical error and offered to fix it before the prescription tax hike would take effect in 2015, if Nixon would sign the bill into law.

A veto could cause Missouri to fall behind its neighbors in a tax-cutting battle for businesses, some Republican lawmakers warned.

Kansas followed up last year’s tax cut by passing an additional tax reduction Sunday. This year’s measure would gradually reduce Kansas’ top income tax rate by an additional percentage point — to 3.9 percent — over the next five years. To partially offset the lost revenues, Kansas would forgo most of a scheduled sales tax reduction.

Oklahoma lawmakers also passed an income tax cut this year — reducing the top personal tax rate from 5.25 percent to 5 percent in 2015 with a second cut to 4.85 percent scheduled to take effect in 2016 if state revenues increase enough to pay for it.

Nebraska Gov. Dave Heineman signed several tax-cut bills into law Monday, including one eliminating the state’s alternative minimum tax and another doubling the deductions people can claim for contributions to a state-sponsored college savings program.

Mo. Gov. Nixon cites many reasons for tax-cut veto

JEFFERSON CITY, Mo. (AP) — Missouri Gov. Jay Nixon raised a variety of objections Wednesday in vetoing legislation that would have cut Missouri’s income taxes. Here is an overview of the concerns cited in his six-page veto message:

LOW TAXES

In general, Nixon said Missouri already has some of the lowest and most stable taxes in the nation. He said the income-tax-cut legislation contains “risky experiments.”

COST ESTIMATES

Nixon contends the bill’s cost estimate prepared by legislative researchers — of between $492 million and $692 million annually, when fully phased in — is understated. He cites an annual cost of more than $800 million. And he said the cost could reach $1.2 billion in a single year. To hit that high mark, several things would have to occur: Congress would have to pass a measure related to online sales taxes, which would trigger an automatic one-half percentage point reduction in Missouri’s income tax, and people would then have to seek retroactive tax refunds.

STATE SERVICES

Nixon asserts the tax cuts would “leave a gaping budget hole for decades to come,” jeopardizing funding for education, public safety and social services.

SALES TAX HIKES

The governor said an apparent bill-drafting error could repeal a sales tax exemption for prescription drugs, costing consumers an estimated $200 million annually. He also objected to a provision repealing a sales tax exemption for college textbooks.

FINANCIAL SAFEGUARDS

The bill would make a phased-in reduction of corporate and individual income taxes contingent upon state revenues growing by more than $100 million over their high point from the previous three years. But Nixon objected because the same trigger would not apply to other tax cuts, including a phased-in 50 percent deduction for business income reported on individual income tax returns.

Nixon said the financial safeguard is faulty because it is based on the growth of tax collections, not the net amount the state receives after tax refunds. And the governor said the tax-cut trigger would have failed to prevent tax cuts during a recession-induced budget shortfall in 2009, had the legislation been in place then.

BUSINESS INCOME

The governor contends that the tax deduction for business income reported on individual tax returns is not adequately defined and would provide an incentive to avoid taxes by creating shell businesses or restructuring existing businesses.

CURRENT INCENTIVES

Nixon said that a general reduction in the income tax rates could undercut previously approved tax breaks for specific businesses. Missouri currently lets some businesses keep a portion of their employees’ withholding taxes as an incentive for expansion projects. If the individual income tax rate is cut, Nixon said those businesses would receive a smaller incentive — potentially jeopardizing their loan payments on projects that already are underway.

UNFAIR TAXES

The governor said the legislation would make Missouri’s tax code less fair by providing two people with identical incomes different sized tax cuts, depending on whether those people own a business structured in a certain way or merely work for a business.

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