Analysis: Huge Missouri tax cut is largely hypothetical at this point

JEFFERSON CITY, Mo. -- From a taxpayers' viewpoint, it's a boon. From the governor's, a boondoggle.

As Gov. Jay Nixon tells it, a clause in the income tax cut bill he vetoed could trigger a $1.2 billion run on the state treasury. The attorney general has seconded the possibility. But for the hypothetical to occur, it would require a chain reaction of events that may not be likely.

In short: "It would be totally unprecedented," said Chuck Pierce, a lobbyist for the Missouri Society of Certified Public Accountants.

At issue is a sentence tucked in the middle of a 177-page bill vetoed by Nixon that lawmakers will consider enacting by an override Sept. 11. The bill cuts Missouri's income taxes in a variety of ways.

The section in question would trigger a one-half of a percent reduction in Missouri's income tax rates if the federal government enacts the Marketplace Fairness Act making it easier for states to collect taxes on online retail sales. That would reduce Missouri's income tax revenue by more than $300 million annually. But legislative analysts forecast Missouri ultimately would take in an equal or greater amount from the broadened sales tax.

As one of the many reasons he vetoed the bill, Nixon cited the potential for the federal Marketplace Fairness Act to trigger an avalanche of state income tax refunds. Nixon, a former attorney general, contends the tax-rate reduction would take effect immediately and also could apply retroactively, allowing taxpayers to seek refunds on three previous years of taxes.

Attorney General Chris Koster, who like Nixon is a Democrat, released a legal analysis last week agreeing with Nixon. He cited the following example: A taxpayer with a steady annual income of $100,000 would get a Missouri income tax break of $455 this year if the federal Marketplace Fairness Act passes Congress and is signed by President Barack Obama. That taxpayer also could file amended tax returns seeking identical refunds for 2012, 2011 and 2010, raising the person's total tax break to $1,820 -- all payable at once.

Republican House Speaker Tim Jones, an attorney who had requested Koster's opinion, didn't like the answer. He called it "a partisan opinion to support the governor's talking points."

Jones pointed instead to an analysis prepared last month by the Committee on Legislative Research, which concluded the income tax rate reduction would not apply retroactively.

The legal precedence on retroactive laws stretches back for decades.

The Missouri Constitution bars any law that is "retrospective in its operation." Accordingly, when the Legislature increased the state's income tax rate from 0.5 percent to 1.5 percent in 1919, the Missouri Supreme Court said the higher rate could only be charged beginning with the Aug. 7 effective date of the law -- not for the full year, as the law had stated. Similarly, the court held that a 1921 law temporarily reducing the tax rate back to 0.5 percent could not apply before the Nov. 2 effective date of that law.

But the legal analysis got more complicated with a 1993 Supreme Court ruling. That case examined how to apply a 1927 law tweaking the calculation of corporate income taxes. At issue was whether Graham Paper Co. could apply the change to the entire year, thus resulting in a lower tax bill, or only after the law took effect July 3.

The court wrote that the constitutional ban on retrospective laws is intended to protect the citizens, not the state, thus suggesting that some retrospective laws are OK. Yet the court still ruled in favor of the state, citing another constitutional provision prohibiting the Legislature from releasing any "liability or obligation of any corporation or individual" due to the state. The court said the higher tax amount accrued before the law changed was an obligation that could not retroactively be waived.

Yet some subsequent tax reductions have been applied retroactively. Most notably, a 2009 law that modified how Social Security benefits are calculated in state income taxes explicitly stated that it was retroactive to 2007. The state Department of Revenue says about 3,000 people filed amended tax returns to take advantage of the retroactive tax break.

Missouri law requires ambiguities over tax liabilities to be construed in favor of the taxpayer. Nixon and Koster say that fortifies their belief that taxpayers could claim retroactive refunds.

But that doesn't mean Nixon's financial predictions will come to pass.

First, Congress must pass the Marketplace Fairness Act. Although it passed the U.S. Senate in May, the bill has stalled in the U.S. House.

If the House does pass it, the state Department of Revenue then must publish a rule change -- which would be subject to legislative scrutiny -- before the state income tax rate reductions could take effect. That could take time.

But assuming that happens, many of the state's roughly 2.8 million income taxpayers would have to amend three prior years of tax returns to seek refunds. That means the department would have to process about four times its normal workload for Nixon's projected $1.2 billion tax loss to hit in a single year.

And that's forgetting one very important thing: "Either way, there would likely be a court challenge," said Pierce, the accountant.