Holden's taxes target a few but could affect many more

JEFFERSON CITY, Mo. -- To little avail, Gov. Bob Holden has been urging lawmakers for months to support higher taxes on cigarettes and casinos and to eliminate what he calls "corporate tax loopholes" -- all to avoid cuts to education and human services.

The Democratic governor promotes his plan as a way to tax the few for the good of the many.

"The undeniable truth is that the vast majority of Missouri taxpayers won't pay one penny more in taxes," Holden told legislators convened at his call for a special session on taxing and spending.

Holden's claims are correct.

But a leading economist and Republican lawmakers say his argument is too simple. Many Missourians would feel the effects of higher taxes, even if the money is not coming directly from their wallets.

Take, for example, Holden's call for an end to "corporate tax loopholes." A plan outlined to legislators during the special session identifies at least seven "loopholes" that, if abolished, could bring the state around $90 million in the first fully effective year.

One of those closed loopholes is projected by the state Department of Revenue to affect less than 2,000 corporations, which Holden contends are avoiding state income taxes by placing their assets in out-of-state banks.

Another of Holden's targeted loopholes is projected to affect all 120,000 corporations in Missouri, which since 1961 have been allowed to keep -- like a handling fee -- a small portion of the state income taxes they withhold from employee paychecks.

Holden argues that Missouri is the only state rewarding businesses for collecting taxes required by law. The Missouri Chamber of Commerce says repealing the incentive would amount to a tax increase on every employer in the state.

Complicated business

Determining the effect on Missourians is a little more complicated.

For businesses, the repeal of so-called loopholes "reduces their net profits or increases their net operating costs, which puts pressure on prices," said economist Ed Robb, who recently retired from the University of Missouri-Columbia and for years has helped craft the state's revenue projections. "Some would be able to pass on a portion of the increase (to customers), and some would not."

The most notable exception to the pass-along principle is the casino industry, which Holden wants to target with higher taxes and fees in exchange for the proposed repeal of the $500 gamblers' loss limit.

Missouri casinos can't pass taxes and fees onto their customers without putting themselves at a competitive disadvantage with casinos in neighboring states, said Jim Moody, a former state budget director who now lobbies for President Casinos.

So if Missouri were to raise taxes on casinos, the gambling industry would make less money -- limiting its ability to hire employees and expand operations, Moody said.

Another prong of Holden's revenue package would raise taxes on cigarettes and other tobacco products. Only about 26 percent of the state's adult population use tobacco products.

But Robb said tobacco taxes also have spillover effects. Missouri's current cigarette tax of 17 cents a pack is one of the lowest in the nation. As such, Missouri attracts tobacco shoppers from higher-tax states such as Kansas and Illinois, Robb said.

Raising Missouri's tax to 72 cents a pack, as Holden wants, likely would result in less business for Missouri stores, Robb said.

House Budget Committee chairman Carl Bearden, R-St. Charles, said a higher tobacco tax also could negatively affect Missouri tobacco farmers.

According to the state Agriculture Department, Missouri has about 650 tobacco growers, who produce a crop worth nearly $6 million.

Holden says the alternative to raising revenues "is to rely only on devastating cuts to education and health care."

"I am not willing to trade teachers and doctors for cigarettes and poker chips," Holden said in one of his most memorable one-liners aimed at Republican lawmakers.