Mo. House passes income tax cut, sales tax increase
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Mo. House passes income tax cut, sales tax increase

Date: April 24, 2013
By: Nick Thompson
State Capitol Bureau
Links: SB 26 and the rollcall.

JEFFERSON CITY - The Missouri House passed a bill Wednesday that legislative staff estimate ultimately could take more than $400 million per year out of the state's budget.

The measure would cut the state income tax, cut the corporate tax, cut business income taxes and raise the sales tax. It also would impose taxes on sales by out-of-state sources if Congress enacts a law allowing out-of-state taxes on sales.

The bill, which was already passed by the Senate, passed the House 90-68.

The bill would begin lowering the state's top individual income tax rate and corporate tax rate in the next fiscal year. The bill would also allow business owners who deduct their business income on their personal state returns to begin claiming a deduction. The bill also would increase the state sales tax rate and divert some of the revenue to schools, roads and a new mental hospital at Fulton.

A report by legislative staff concluded the measure could cost the state $438 million when fully implemented in the 2019 budget year. If the out-of-state sales taxes can be imposed, the loss to the state would drop to $238 million.

Supporters have argued the losses would be covered by economic growth that would be spurred by the tax cuts.

Rep. Doug Funderburk, R-St. Charles County, said an income tax cut creates a "rising tide" in economic growth because it allows workers and business owners to keep more of what they earn.

"If you raise these tides then all boats will float higher," Funderburk said.

Several Republicans argued the state will actually see more money in the coffers in the future if taxpayers keep more of what they earn. Rep. T.J. Berry, R-Kearney, said too often lawmakers look into the past when crafting bills.

"We don't look at how this will change our future and move us to a place where we have a growing economy and growing tax revenue," Berry said.

The bill would raise the state sales tax from 4 percent to 4.6 percent by 2017 and would phase in the increase from 2014 to 2017. After the Senate passed the legislation in March, Gov. Jay Nixon issued a statement denouncing the Senate's plan. Nixon said the sales tax hike would hurt the poor, who tend to spend a greater share of their income on consumer goods.

Throughout the legislative session, Nixon has voiced opposition to tax cut legislation because he said he believes Missouri is already a low tax state.

Rep. Andrew Koening, R-St. Louis County, said consumption taxes are a more reliable revenue source and with the hike Missouri's sales tax rate would still be lower than those in surrounding states. Of the eight surrounding states, only Oklahoma and Nebraska have rates below 6 percent.

"Even here in Missouri consumption taxes are 50 percent more reliable than income taxes," Koening said, "So if you're planning to budget I would think you would want something that is more consistent."  

Rep. Margo McNeil, D-St. Louis County, said it will be difficult for the state to recover revenue if a future General Assembly finds the tax cut was a mistake. The state Constitution requires the legislature to put most tax increases before voters and McNeil said it would require a major education process to get voters to approve a tax increase.

"That's a very serious thing to think about," McNeil said. "We do need the revenue for our roads, for our schools, for our health care, for our seniors, and all the other things that we use government to do."

Most of the House Democrats voted against the legislation and were joined by some Republicans in their opposition. Rep. Denny Hoskins, R-Warrensburg, said the loss in revenue from a tax cut would probably lead to a cut in funding for for public schools.

The bill would phase in income tax cut provisions from 2014 to 2018 and the House proposed the provisions should only go into effect if state revenues increase by $100 million from the previous year.

The bill would reduce the state's top individual income tax rate that taxpayers with annual incomes over $9,000 pay from 6 percent to 5 1/3 percent. The bill would reduce the corporate tax rate from 6.25 percent to 5.5 percent. The business tax deduction would allow filers to eventually deduct 50 percent of their business income by 2018.

Koening said the bill is a "small step" and does not cut taxes as drastically as Kansas did, as Kansas eliminated taxes for nearly 200,000 small businesses. The bill is expected to reduce state revenues by nearly $438 million annually when all provisions go into full effect in 2018, according to legislative staff estimates. Several Republicans said new revenues generated from taxpayers spending more of their own money will off-set the loss of revenue.

Rep. Jon Carpenter, D-Clay County, said that logic is "voodoo economics."

"I doubt literally a single person will make the decision to come and live in Missouri because we've taken the income tax rate from 6 percent to 5 1/3 percent," Carpenter said.

Carpenter said that while the House-amended bill would direct some of the sales tax revenue to schools, the loss in revenue from the income tax cut would ultimately mean cuts to education funding.

The bill now heads back to the Senate where senators can either accept the changes, sending the bill to the governor, or reject them and enter a conference committee with House members.