Tax exemption for seniors may face Senate resistance

Sunday, January 14, 2007

The proposal from House Speaker Rod Jetton to eliminate the state income tax on Social Security benefits appears to be a popular notion among Republicans in the Missouri House, but GOP state Senate members aren't running to embrace the idea.

So far, 10 bills have been filed in the Missouri House that would eliminate the tax, cut the tax on other retirement benefits, or both. Only one similar bill -- to exclude 25 percent of Social Security benefits included in income tax calculations -- has been introduced in the Senate.

Jetton, R-Marble Hill, announced the specifics of his tax plan at a news conference Thursday in Jefferson City. The tax cut would reduce state revenue by $105 million, Jetton estimated.

Gov. Matt Blunt has said he, too, wants to propose a tax cut when he unveils his budget at the end of the month. Blunt hasn't named the specific reductions he wants.

The tax-cutting ideas have been sparked by a sharp increase in state revenue. When combined with Medicaid changes that eliminated benefits for 114,000 people, the surge in tax collections have left the state with as much as $600 million in extra cash. And according to figures on the Internet site of the state Office of Budget and Planning, revenue for the coming budget year, which begins July 1, could exceed the current year's expenses by another $500 million to $600 million.

At the same time, state budget director Larry Schepker said last month that state revenue is more than $1 billion below the legal maximum set by the Hancock Amendment.

Eliminating the tax on Social Security benefits is a matter of fairness, Jetton said. The money paid into Social Security is taxed as workers earn it, he said, and Missouri is one of only 15 states that tax benefits.

"With a little more money in their pockets, seniors will be better prepared to deal with the rising costs of medication, food, housing and transportation," Jetton said.

Only a portion of Missourians receiving Social Security benefits pay taxes on the money. Missouri income tax forms use the income reported for federal taxation as a starting point. Individuals with incomes greater than $25,000, and married couples with incomes above $32,000, must pay taxes on half of their benefits. When income increases to $34,000 a year for individuals and $44,000 for married couples, federal law includes 85 percent of Social Security benefits in taxable income.

Missouri already provides retirees with tax breaks for taxable pension income. Those over 65 with incomes below $25,000, and married couples with incomes below $32,000, can exclude $6,000 in pension income from their taxable income.

Bills introduced in the House include proposals to eliminate the income restrictions on the pension exclusion, increase the exclusion to $18,000 or eliminate the cap entirely. One proposal would both eliminate the cap and the income restrictions.

Jetton's plan is already under attack from the Missouri Budget Project, a not-for-profit group that has in the past been critical of spending priorities of Blunt and the legislative Republican leadership. Nearly 45 percent of seniors would receive no benefit from the tax cut, the group said in a release issued after Jetton made his proposal. And another 17 percent would receive less than $100 in reductions, they said.

But resistance to the idea could be strongest in the Senate, where Republican leaders said they want a comprehensive review of state tax policies rather than additional exemptions. The Senate GOP leadership wants to move cautiously on taxes, Senate President Pro Tem Michael Gibbons, R-Kirkwood, said in an interview prior to the legislative session. And in an interview with the Kansas City Star, Senate GOP leader Charlie Shields, R-St. Joseph, said any tax cuts should be aimed at stimulating the state's economy so that, in the long term, it increases state revenue.

The current exclusions for pension benefits, as well as much of the sales tax on food, were passed in the late 1990s, the last time the state was enjoying robust revenue.

The basic structure of state taxation has remained unchanged for far too long, Gibbons said, and the tax code is filled with advantages for special interests provided through legislative favor.

A simpler, fairer system that results in an initial cut in revenue is the direction Gibbons said he would pursue.

"That is better for the people of Missouri, but it is going to cause intense scrutiny by special interests and it creates a big battle," Gibbons said.

335-6611, extension 126

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