Battle over state income tax cut will be revived in Missouri Legislature

01/06/2014 7:21 AM

01/06/2014 7:21 AM

Republicans are readying a new plan to cut state income taxes, one they hope will avoid the pitfalls that thwarted them in September when they failed to override a veto by Gov. Jay Nixon.

The latest proposal would focus on tax relief for small businesses rather than corporations or families. To minimize opposition, House drafters are shooting for a tax cut that would cost state coffers no more than $120 million a year.

Nixon vetoed a broader tax cut last summer, calling it an experiment that would punch a hole in the state budget and hurt education funding. Despite holding a supermajority in both chambers, Republicans failed to override the veto when 15 GOP House members sided with the Democratic governor.

Now, after months of negotiations, some of the defectors say they are on board with the narrower bill.

“If they really and truly want to have a shot at an override, we’ve got to keep it simple and focused,” said Rep. David Wood, R-Versailles. “If you throw in everything but the kitchen sink, you’re offending too many people and making the price tag too big.”

How to reshape the tax code will be one of the marquee issues in the legislative session that opens Wednesday and runs through May 16. While they differ on how much of a cut the state should grant, Republican legislators contend that reducing income taxes would spark productivity and help the state compete for jobs with neighboring states, such as Kansas and Oklahoma.

The driving force behind the movement is mega-political donor and retired investment executive Rex Sinquefield of St. Louis. He has been pressing for seven years for an income tax cut.

As he has done with other issues, Sinquefield eventually may finance an initiative petition drive to get a tax overhaul on the statewide ballot if legislators don’t act. Petitions his representatives have filed with the secretary of state would begin that process.

Tax cut do-over

The tax cut that legislators passed last session spurred a fierce political fight, with Nixon crisscrossing the state all summer to campaign against it and supporters taking to the airwaves to defend it.

In its main provisions, the bill would have gradually reduced corporate and personal taxes, so long as state revenue rose by at least $100 million annually. It would have shielded from taxes 50 percent of business income reported on individual returns.

Additional cuts could have been triggered if the federal government made it easier for states to tax online sales.

Nixon said the bill would have taken $800 million from the state budget, threatening funding for education and other services. The governor also blasted an apparent drafting error that would have raised taxes on prescription drugs.

In September, Nixon prevailed when the House voted 94-67 for the override, falling short of the 109 votes needed for a two-thirds majority.

So legislators went back to the drawing board.

The bill’s sponsor, Rep. T.J. Berry, R-Kearney, began meeting with educators, dissident Republicans and Nixon’s staff.

House Speaker Tim Jones, R-Eureka, said Berry was working to “tighten the bill up, dot the i’s, cross the t’s, make it something as many members as possible can support.”

Berry said his revised bill would strip out the personal and corporate tax breaks and tighten the 50 percent tax cut for businesses that “pass through” their income to the owners’ personal return.

In a key move, the amount of business income that could be exempted would be capped. Berry wasn’t sure exactly where he would draw the line but said it would be below $200,000. He said he was trying to keep the bill’s price tag to between $80 million and $120 million.

He also wants to clearly define business income to make sure it targets entrepreneurs. Rental income, for example, may not get the break.

“All the things the governor said he had questions on, I have made sure to remove from the bill,” Berry said. “My original bill was truly about trying to incentivize business. After the Senate got hold of it, the price tag went up tremendously, and that’s when we started getting a lot of opposition from the education community.”

The changes sound good to Rep. Nate Walker, R-Kirksville, one of the 15 Republicans who rejected the override.

“The last bill was flawed because it had all these other things in it, and some things that weren’t even intended to be in it,” Walker said.

Clash likely with Senate

Berry’s plan still faces considerable hurdles.

Chief among them: Several GOP senators are seeking bigger tax cuts, including a gradual reduction in the 6 percent top personal income tax rate.

“We need to be bold,” said Sen. Eric Schmitt, R-Glendale. “We want to have something broad-based. We want to have something significant.”

Sens. John Lamping, R-Ladue, and Will Kraus, R-Lee’s Summit, also have filed tax cut bills. Lamping would establish a $400-per-child tax credit for middle-class families.

Kraus proposes to cut taxes on personal income, business income and the first $25,000 of corporate income. He said his bill would actually have a higher cost than last year’s measure because it would reduce the personal income tax rate to 5 percent instead of 5.5 percent, as the previous plan did.

“I want to do an across-the-board tax cut,” Kraus said. “If we just do a small cut, it really isn’t going to have any impact on our economy and the growth of our state.”

Other legislators are likely to tack on tax goodies for various interest groups. Already, two Springfield-area legislators have issued a news release touting a tax cut for fitness and yoga classes.

Nixon, meanwhile, has tried to ward off a big tax cut by saying he wants to use increased state revenue to boost education funding. For example, he hopes to fully fund the formula for K-12 public schools by January 2017.

At a news conference last month, the governor said he would consider a tax cut if it was affordable and targeted to job creation.

He declined to specify what type of tax cut would meet his criteria, saying only that a targeted tax policy would be “more beneficial to economic growth than pouring water on a cold floor and hoping it’s an ice rink.”

While leaving the door open a crack, he sounded unconvinced that a tax cut was needed to spur jobs.

“It’s always important to note we have some of the lowest taxes in the country,” Nixon said.

Complicating the picture even more, Berry said the governor’s staffers told him they wanted any tax cut to be linked to tax credit reform.

“I don’t know how easy that’s going to be,” Berry said.

Showdown with developers

Tax credits are like vouchers that businesses and individuals can use to reduce their income taxes and some business taxes. Missouri gives out credits for various activities, such as cleaning up contaminated sites and restoring historic structures.

Fiscal conservatives in the Senate have sought for years to rein in the state’s roughly 60 tax credit programs, which cost the state about $500 million a year.

The overhaul has died the last four years because of differences between the Senate and the House. The biggest sticking point has been where to cap the largest program, which funds development of low-income housing.

But new momentum for reform may have developed because of a deal Nixon struck with five senators at a special legislative session last month. The senators had threatened to block a Boeing Co. incentive package that the governor was pushing. Those subsidies were aimed at luring Boeing to manufacture its new commercial plane in St. Louis County.

Senators let the Boeing bill pass after Nixon agreed to use his leverage to fight for tax credit reform.

Nixon immediately persuaded a state board to freeze issuance of new credits under the low-income housing program while the Legislature works on tax credit reform.

Senators who suggested the tax credit slowdown said they hoped it would bring developers to the negotiating table.

Until now, “there’s never been a moment when the spigot has been turned off,” said Sen. Brad Lager, R-Savannah.

Some Democrats, however, said Nixon shouldn’t have struck a deal in secret. The Legislative Black Caucus sent Nixon a letter expressing “anger and disappointment.”

In an interview with Post-Dispatch editorial writers and reporters, Nixon defended his move. He said he held up issuance of new housing credits until at least March to “send a signal … those non-job tax credit programs” must be curtailed. He hopes legislators reach a consensus on the issue early in the session.

Housing developers are gearing up to oppose any cuts.

Jorgen Schlemeier, who lobbies for the Missouri Workforce Housing Association, has already begun making detailed presentations to legislators. He cites the social benefits of safe and affordable housing, such as improving children’s grades and helping parents hold jobs.

“We think it’s a good program,” Schlemeier said.

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