Budget problems overshadow economic development

Guest editorial

By Daniel P. Mehan

President, Missouri Chamber of Commerce

JEFFERSON CITY -- Albert Einstein once said that the definition of insanity is doing the same thing over and over again, expecting different results. He probably wasn't referring to Missouri government, but it is a good way to describe the 2002 legislative session.

Although early in the session it was apparent Gov. Bob Holden had proposed a state budget requiring more funds than revenues would bear, few proposals were considered for long-term budget reform. While much attention was given to spending cuts, withholdings, and the passage of various short-term schemes to cover gaps in state spending, in the end, Missouri still is set to spend as much in 2003 as in 2002 -- and more than double the $8.9 billion it took to run state government 10 years ago.

Some positive proposals were passed, such as a transportation-funding package, and both tax and environmental reforms. But, because legislators spent most of the session scrambling to patch leaks in Missouri's bloated budget, many issues key to economic growth and state revenue creation -- including a statewide economic development package, life sciences initiatives and workers' compensation reform -- fell by the wayside.

After blocking relentless attempts by lawmakers and the administration to raise employers' taxes to cover budget shortfalls, Missouri employers took a $27 million loss in state tax benefits in the omnibus tax package, which was sent to the governor in the final hours of the session. The lost state deduction, scheduled to begin on July 1, 2002, will eliminate for one year a provision of the Bush economic stimulus package that would have allowed an employer to add a 30 percent first-year depreciation for any equipment purchased after Sept. 10, 2001.

In Missouri, a deduction in federal income tax automatically triggers a state income tax deduction. This legislation decoupled the deduction. The benefit was intended to spur employer investment and give the economy a much-needed push. Now, Missouri employers will not be able to take advantage of state tax benefits that employers in other states are enjoying, diminishing the impact of the federal stimulus package in Missouri.

While disappointed in this loss, Missouri employers could have fared much worse. At one point, Missouri employers were targeted for more than $190 million in tax increases, most of which were ongoing taxes.

One such proposal sought to eliminate employers' timely filing discount for withholding employees' income tax. Tagged by supporters of the tax increase as a tax loophole or tax incentive, the existing 41-year-old statute provides legitimate compensation to employers for meeting state requirements such as child support and other wage garnishments.

Another defeated proposal would have required Missouri employers doing business in other states to pay Missouri tax on income such as interest, royalties, dividends and capital gains earned outside the state. These attempts to require employers to shoulder budget shortfalls would have damaged Missouri's business climate.

Because so much time was spent debating quick fixes to budget problems, Missouri lost out on a major economic development opportunity in Senate Bill 1279, a proposal to invest $644 million of state funds in sports stadiums and other economic development projects around the state. One of the largest economic development opportunities in state history and vitally important to our major metropolitan areas, the legislation was passed on May 7 by the full Senate and later by a House committee, but was denied debate by the Speaker of the House.

Workers' compensation reform is another economic development effort that was overlooked by House leadership this session. Workers' compensation rates are back on the rise. Also increasing are reports of system abuse. Although numerous workers' compensation bills were introduced in both the House and the Senate, all suffered the same fate. Almost all were denied the opportunity for House committee review, and none saw floor debate.

The long-term solvency of Missouri's unemployment insurance trust fund also was the subject of much scrutiny this legislative session. A state audit on Jan. 9 reported that the trust fund would be insolvent within the year.

Following the audit came action on legislation to increase employer unemployment insurance taxes by $1 billion over the next three years - without analysis or reform of the alarming trend of increased payments from the fund. That move was blocked by efforts by the Missouri Chamber of Commerce, and the fund was bolstered by an unexpected $161 million windfall from President Bush's economic stimulus package. This windfall allows time for employers, labor and lawmakers to consider serious reform of Missouri's unemployment compensation system prior to the 2003 legislative session.

In no area was budget reform more critical than transportation. Missouri's transportation system has not been a budget priority for many years. The result is a deteriorating system that is underfunded by $1 billion annually, according to state officials. The Missouri Chamber of Commerce pushed hard for a transportation funding package, and on the last day of session, lawmakers agreed to put before voters in August 2002 a proposal that would raise $511 million in sales and fuel taxes to improve Missouri's transportation system.

In almost every issue that was debated this session, Missouri's budget problems became a dominating factor. It caused numerous economic development opportunities to be lost. The one-time fixes lawmakers spent so much time implementing this session will only address 2003 problems, and these remedies will not be available next session. That means even larger gaps likely will exist between state spending levels and revenues for the next fiscal year.

Until lawmakers and the administration make moves to address the real reason behind Missouri's budget shortfalls -- government overspending -- Missouri will continue to face a bleak outlook for economic development in the future.