Corporate taxes on the minds of legislators

Friday, March 7, 2003

In a year when political nerves in Jefferson City are prickly and when elected officials at every level of state government are overwhelmed with budget matters, one topic that seems to be attracting a bit of positive feedback from all sides would cut taxes on corporations.

In his State of the State address, Gov. Bob Holden proposed reducing the state income tax on corporations by $28 million a year. That idea was counterbalanced with another sweeping proposal to close several loopholes that allow out-of-state corporations that do business in Missouri to avoid paying taxes here. Closing the loopholes, the governor estimated, would generate $185.6 million in new revenue.

Earlier this week, members of the House Tax Policy Committee heard testimony from pro-business groups on a bill to lower the corporate income-tax rate to 5.25 percent, a full percentage point lower than the current 6.25 percent rate.

Groups like Associated Industries of Missouri and the Missouri Chamber of Commerce said the cut would help retain jobs and attract new businesses to the state.

The House bill would decrease the burden on Missouri corporations by an estimated $18 million a year, significantly less than Holden's plan. The difference is the result of how the taxes would be calculated.

Bills also have been introduced in the House and Senate to address the loopholes the governor had already targeted. Hearings have yet to be scheduled, but the increased revenue from these bills would be significantly less than $185.6 million.

Most businesses subject to corporate income taxes recall when the state tax rate went up to 6.25 percent from 5 percent as a result of the 1993 Outstanding Schools Act, which at the time was described either as the largest state tax increase in history or one of the largest, depending on how you measured it.

All of the revenue from the corporate income tax goes to general revenue, but the amount raised by the 1.25-percentage-point 1993 increase is earmarked for schools.

Under the plan currently being considered by the House, the reduction in revenue would come out of general-revenue appropriations, and the tabbed revenue would still go to schools.

As for the loopholes, there are a variety of issues that the governor believes unfairly reduce the state tax burden.

One of the most blatant involves corporations that have revenue-producing operations in the state but are incorporated elsewhere.

Last November, the Missouri Supreme Court decided that existing statutes that say revenue "derived from sources in Missouri" may be taxed was too vague and further ruled the state could not tax out-of-state corporations on that basis. Making this income taxable would require a careful clarification of statutory language.

While legislators appear to be warming to a cut in corporate income taxes, there is likely to be considerable debate over the loopholes Holden wants to close. That debate will be framed by questioning how lowering corporate income-tax rates by $18 billion and raising corporate taxes $185.6 million by closing loopholes can be viewed as a good incentive for existing and potential businesses and industry.

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