Battling back against tax cuts in neighboring Kansas, Missouri lawmakers gave final approval Thursday to an income tax cut for businesses and individuals that could reduce state revenues by about $700 million annually when fully phased in.
The legislation, which would mark the first decrease in Missouri's income tax rate since 1921, was touted by majority party Republicans as a means to keep Missouri economically competitive in an interstate battle for businesses. Some Democrats warned it could jeopardize future funding for schools and other government programs.
Democratic Gov. Jay Nixon has not indicated whether he will sign or veto the bill but has said he will "assess its impact on vital public services."
The House passed the legislation 103-51, falling six votes short of the threshold that would be needed to override a potential veto. The Senate passed the bill Wednesday by a 24-9 vote.
The measure would phase in a 50
percent deduction for business income reported on individual income tax returns, starting in 2014 and continuing through 2018.
It also would gradually reduce 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.
"While this may be slightly controversial ... it is very measured," said Rep. T.J. Berry, R-Kearney, who sponsored the bill. "The triggers that are in this mean there will be an increase in revenue guaranteed."
Legislative researchers estimate the eventual cost of the tax cut legislation at $692 million annually. The nonprofit Missouri Budget Project, which analyzes fiscal issues and opposes the income-tax cut, estimates the eventual cost at $817 million annually. The gap stems from different assumptions about what sort of earnings would qualify for the business income tax deduction.
Under either estimate, the legislation amounts to "a budget-busting tax reform plan" that is unlikely to make Missouri a desired economic destination, said Rep. Jon Carpenter, D- Kansas City.
"Would anybody read in the newspaper that Missouri's gone from 6 to 5.5 (on its individual income tax rate) and make the decision to move here?" Carpenter said. "I can't imagine anybody doing that. So we don't get much benefit and we've got a lot of cost."
Missouri Republicans said their plan isn't as aggressive as the one that took effect this year in Kansas, which kicked in quickly instead of gradually and included no provisions to guard against revenue shortfalls. The Kansas measure reduced income taxes, increased standard deductions and exempted the owners of 191,000 partnerships, sole proprietorships and other businesses from income taxes. Kansas Gov. Sam Brownback, a Republican, now 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.
Although much of its benefit is aimed at businesses, Missouri's tax-cut plan also includes provisions aiding lower-income residents. The legislation 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. One provision tightens the wording in Missouri's current tax laws with the intent of requiring more out-of-state businesses and online retailers to pay Missouri taxes on items bought by Missouri residents. Another section would enroll Missouri in a multi-state compact through which online retailers voluntary collect taxes on sales to residents in those states.
The bill also includes an amnesty offer meant to entice delinquent taxpayers to finally pay up. Those who pay overdue taxes between Aug. 1 and Oct. 31 would not be assessed penalties or interest, so long as they abide by Missouri's tax laws for the next eight years. The measure is projected to generate more than $50 million in taxes that would not otherwise be collected.