Missouri businesses and individuals could eventually reap around $700 million annually in tax savings under legislation passed Wednesday by the state Senate that is intended to keep up with Kansas in an ongoing battle for businesses.
The legislation would cut business income taxes nearly in half while phasing in a smaller reduction for individuals over the coming decade. It would mark the first cut in Missouri's income tax rates in more than 90 years.
While Democrats warned of budgetary doom, majority party Republicans predicted the tax cuts would lead to an economic resurgence - or at least make bosses think twice before moving their businesses to Kansas.
Unlike recent income tax cuts in Kansas, the Missouri plan includes a contingency clause making each incremental tax cut effective only if state revenues continue to grow. But unlike previous versions, the Missouri bill contains no sales tax hike to help offset the lost income tax revenues.
The Senate's 24-9 vote moves the bill to the Republican-led House, where a final vote would send it to Gov. Jay Nixon. The Democratic governor, who opposed prior versions containing the sales tax increase, has not said whether he would sign or veto the legislation.
"If the bill makes it to my desk, I will give it a thorough review and assess its impact on vital public services," Nixon said Wednesday in an emailed statement.
The tax cut is a priority for Republicans, who hold their largest legislative majorities since the Civil War era.
"The goals that we have (are) to enact policies that will spur
employment, that will grow personal incomes and will grow our economy ... and a tax cut was part of that agenda," said Senate President Pro Tem Tom Dempsey, R-St. Charles.
The legislation phases in a 50 percent deduction for business income reported on individual income tax returns, starting in 2014 and continuing through 2018.
It also gradually reduces the state's top individual income tax rate of 6 percent to 5.5 percent and decreases the current 6.25 percent corporate income tax rate to 3.25 percent over the next decade. But those annual tax rate reductions would take effect only if yearly revenues grow by at least $100 million over the state's highest general revenue point in the previous three years.
The nonprofit Missouri Budget Project, which analyzes fiscal issues, has opposed the income tax cut. The project's executive director, Amy Blouin, called the deduction for business income a "tax loophole" and said the $100 million revenue trigger "creates a false sense of security." At that pace, revenues would not keep up with inflation much less meet escalating costs in the Medicaid health care program or public school funding formula, Blouin said.
Although legislative researchers estimate the eventual cost of the tax cut legislation at $692 million annually, the Budget Project puts the cost at $817 million annually. The gap stems from different assumptions about what sort of earnings would qualify for the business income tax deduction.
Either way, "this is a pretty big chunk and not a very responsible move on our state," said Sen. Paul LeVota, D-Independence.
Missouri Republicans said their plan isn't as aggressive as the one in Kansas, which reduced income taxes, increased standard deductions and exempted the owners of 191,000 partnerships, sole proprietorships and other businesses from income taxes. The Kansas income tax cuts took effect this year. Now Republican Kansas Gov. Sam Brownback is pushing legislators to cancel a scheduled sales tax cut in order to avoid budget shortfalls over the next five years that he says could necessitate cuts to higher education funding.
Missouri's legislation also would increase an existing $2,100 personal deduction on income taxes by $1,000 for individuals who earn less than $20,000 of adjusted gross income.
Other sections of the legislation are intended to generate revenues by increasing tax collections from online sales and giving an incentive for overdue taxpayers to finally pay up. The bill would waive penalties and interest for people who pay delinquent taxes between Aug. 1 and Oct. 31.