Attempting to keep pace with tax-cutting Kansas, Missouri senators endorsed a plan Wednesday to shave hundreds of millions of dollars off the income tax bills of businesses and residents. But the tradeoff could be higher taxes for shopping at stores and online.
The legislation given preliminary approval by the Republican-led Senate could mark Missouri's most significant overhaul of its tax policies in a couple of decades.
Republicans expressed hope that it would spur an economic revival - or at least keep businesses and residents from being lured across the state's western border by the siren call of lower taxes. Yet some Democrats called it "irresponsible," noting that Kansas now faces a budget gap as a result of sweeping tax cuts that kicked in this year.
The Missouri legislation, which needs another vote to go to the House, would gradually reduce the state's income tax rate by three-quarters of a percentage point over five years while gradually increasing the state sales tax by one-half of a percentage point over that same period.
In addition to an overall income tax cut for individuals and businesses, the new plan would roughly double Missouri's current income tax deduction for people with adjusted gross incomes of less than $20,000 annually. The legislation also attempts to boost tax collections by tightening the requirements for when retailers must collect Missouri taxes and by joining a multistate compact that collects taxes from online sales.
When the income tax cuts are partially offset by the sales tax increases, the net effect could be a roughly $450 million reduction in state tax revenues, according to estimates from sponsoring Sen. Will Kraus, R-Lee's Summit.
The nonprofit Missouri Budget Project, which analyzes financial issues with an emphasis on their effect on the poor, estimated that the Senate legislation could reduce tax revenues by $700 million when fully phased in.
Kraus emphasized that his plan doesn't go as far as the one passed last year in Kansas, which cut income taxes without raising its sales taxes and now faces a projected budget shortfall of around $200 million for the fiscal year beginning in July. But he said his bill could make Missouri more competitive with its neighbor.
"I'm trying to stop the bleeding. I'm trying to stop the businesses from fleeing into Kansas," Kraus said.
He proclaimed the plan "fiscally sound," predicting it would "create an economic engine in our state" that would generate enough new tax revenues to make up for the losses.
But some Democrats warned that the tax cuts could wreak havoc on Missouri's budget, making it even more difficult for the state to provide money to its already underfunded public schools. Senate Minority Leader Jolie Justus, D-Kansas City, was among those who called the plan "irresponsible."
"What good are all these businesses going to be if we have a bunch of uneducated, unhealthy citizens?" Justus said during Senate debate.
Sen. Jason Holsman, D-Kansas City, suggested Missouri should wait to see the effect of the Kansas tax cuts.
"It may turn out that Kansas decides it wasn't such a good fiscal policy to decimate their revenue," Holsman said.
The recently enacted Kansas law reduced individual income taxes, increased standard deductions and exempted the owners of 191,000 partnerships, sole proprietorships and other businesses from income taxes. As a result of the ensuing budget gap, Kansas Gov. Sam Brownback has proposed to generate state revenues by eliminating income tax deductions for the mortgage interest and property taxes paid by homeowners. He also wants to cancel the scheduled expiration of a temporary sales tax increase.
If Missouri cuts its income taxes and revenues take a nose dive, lawmakers wanting to reverse course would have to seek voter approval to raise the taxes because of provisions in the state constitution, Holsman said.
Kraus, who is chairman of the Senate Ways and Means Committee, had brought a plan to the Senate floor last week that included income tax reductions only for businesses and for residents with income above $7,000 annually. He said he added the additional income tax deduction for lower-income residents at the request of Sen. Maria Chappelle-Nadal, D-St. Louis. He added the sales tax provisions in an attempt to bring down the amount of lost state revenues.
During debate Wednesday, the Senate also accepted an amendment by Sen. Scott Sifton, D-St. Louis, that pared back Kraus' original plan to cut income taxes by a full percentage point and added an additional tax break that Sifton said would primarily benefit small businesses. Kraus supported the amendment.