Disregarding objections from Democratic Gov. Jay Nixon, Republican House members endorsed a pair of income tax cuts Wednesday that could reduce Missouri tax revenues by hundreds of millions of dollars annually.
Each of the two bills given preliminary approval would create a tax break for business income that's reported on individual tax returns. The provision is intended by supporters to aid small business owners and counter an even more aggressive tax break recently enacted in neighboring Kansas.
One of the bills would pair that business income deduction with a corporate income tax cut projected to cost up to $347 million annually. The other would attach it to a reduction in Missouri's individual income tax rate, estimated by legislative researchers to eventually waive $704 million of tax revenues annually.
"We need to create an environment that grows our businesses. Why? Because our businesses are the ones that employ everyone," said Rep. T.J. Berry, R-Kearney, the sponsor of the business-focused tax cut.
Berry also was the sponsor of an income tax cut bill vetoed last year by Nixon. The governor raised concerns about apparent drafting errors and the potential for the tax cut to drain money from public schools and other state services.
An attempt to override Nixon's veto failed last September on a 94-67 vote - 15 shy of the 109 votes needed for a two-thirds majority. But Republican legislative leaders have again made an income tax cut a priority for the 2014 session.
Nixon said last week that he's willing to sign legislation cutting individual income taxes by up to one-half of a percentage point, but only if certain contingencies are included to protect funding for schools. Nixon also has objected to the proposed tax break for business income, saying it rewards "creative accounting instead of a hard day's work." He has threatened to veto any bill that doesn't abide by his parameters.
"I am concerned that the bill the House is currently debating is a broader bill than last year - the one that I vetoed, that they could not muster the support to override," Nixon said Wednesday.
Some House Democrats also criticized the business income tax deduction. Rep. Jon Carpenter, D-Kansas City, said it would give employees an incentive to categorize themselves as consultants so they would be eligible for their own business tax break.
Berry's business-tax-cut bill won first-round approval by a 104-48 party-line vote with eight members absent. A bill by Rep. Andrew Koenig containing tax cuts for both businesses and individuals received initial approval by a 101-49 party-line vote with 10 people absent. A second vote is needed to send the measures to the Senate.
House Majority Leader John Diehl said a strong vote shows Republicans could have a better shot this year at overriding a potential gubernatorial veto. Republicans currently hold 108 seats but would need to win just one of three special elections in August to boost their ranks to a veto-proof majority in time for a potential veto override attempt in September.
Berry's bill would phase in a 50-percent deduction for business income reported on individual tax returns and would gradually cut the corporate income tax rate to 3.125 percent from its current 6.25 percent over five years. Those incremental tax cuts would start this year and continue so long as state income tax revenues remain above their 2012 level. But businesses that pay employees 150 percent of the county's average wage could claim the full tax cut immediately.
The bill by Koenig, R-Manchester, would phase in the business income deduction so long as state revenues keep rising by $150 million annually over their high point from the previous three years. A similar contingency would be applied to the bill's gradual reduction of the individual income tax rate to 5.3 percent from its current 6 percent over seven years. An amendment added Wednesday would ensure $60 million would go to public schools and $30 million to higher education in each year revenues rise by at least $150 million.
Koenig's legislation also would create a $1,000 tax deduction - on top of Missouri's existing $2,100 deduction - for individuals earning less than $20,000 annually, without regard to whether state tax revenues keep growing.