Mo. Senate proposes smaller Social Security benefit tax cut

Thursday, May 3, 2007

JEFFERSON CITY, Mo. (AP) -- The Senate early Thursday morning voted to accept a slimmed-down state income tax exemption on Social Security benefits and some retirement benefits.

The Senate voted 29-3 to endorse its version of the tax cut but did not vote on whether to pass the legislation because the bill's cost must still be analyzed.

The measure is a priority for House Speaker Rod Jetton and Gov. Matt Blunt, but concerns about the bill's cost had stalled the bill in a Senate committee for more than six weeks. A House version would have cost at least $285 million.

The Senate's version, which would begin the tax cuts this year, would be fully implemented in 2012. It's estimated to cost $155 million that year.

Currently, Missourians whose income -- minus half of their total Social Security entitlement -- is less than $25,000 for an individual or $32,000 for a couple, do not pay any state income taxes on their Social Security benefits. Pensions up to $6,000 also are not taxed.

The Senate plan would raise those income exemptions to $85,000 for individuals and $100,000 for couples. But some whose income lands above that would still get some tax relief. That's because for every dollar that income exceeds the $85,000 or $100,000 cap, a dollar of the retirement benefit that would be exempted is taxed.

For example, a couple that after the plan is fully implemented earns $110,000, would pay taxes on $10,000 of their Social Security benefits. Conversely, a couple that that earns $90,000, would pay not pay any taxes on their benefits.

The pension exemption would cover those who opted out of the Social Security system and thus do not receive benefits through the federal program. That includes teachers, firefighters, police officers, military personnel, federal employees and railroad workers.

Retirement benefits would not be tax exempt until the retiree turns 62, but the disability benefits would be exempt at any age.

Jetton, R-Marble Hill, said exempting all Social Security benefits from state income tax would affect 250,000 people and the Senate's version would cover Social Security benefits for about 220,000. Senate Republicans estimated their version would cut taxes on Social Security and pension benefits for 240,000 Missourians.

Jetton said the Senate's version is disappointing.

"I don't like it, but I realize you can't always have it your way or the highway," Jetton said.

"It's the art of compromise," he added.

Senators said the changes would likely be needed to make the tax cut affordable.

"It's the most exciting piece of legislation that I've seen since I've been up here," said Sen. Kevin Engler, R-Farmington.

Critics of cutting the state income tax on retirement benefits have said they worry the state's economy could take a downturn and the lost revenue could pose a problem. Some Democratic senators also said lawmakers should not be cutting state revenue when there are health care and other social service needs.

The size of the tax cut is "not reduced enough, and it's going to affect future generations," said Sen. Jolie Justus, D-Kansas City.

The Senate legislation also eliminates an income tax deduction for those who work in Missouri but live elsewhere. People who pay property taxes in another state are allowed to deduct that from the income tax they pay in Missouri -- just like Missourians are allowed deduct their instate property taxes from their income taxes.


Retirement tax exemption is HB444.

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