House approves tax cuts for Social Security, pension benefits

JEFFERSON CITY, Mo. -- Lawmakers gave final approval Friday to a tax cut that exempts more Social Security and retirement benefits from the state income tax.

The tax cut would start this year and be phased in through 2012. It's estimated to cost the state $154 million when fully implemented.

The Republican-led House approved it 133-11, with only a few Democrats objecting, sending the bill to Gov. Matt Blunt. The Senate passed the bill earlier this week.

The measure is the top priority of House Speaker Rod Jetton, and Blunt also has urged lawmakers to support it.

Jetton, R-Marble Hill, said the state income tax on Social Security benefits or pension systems for those who have opted out of the federal program is an "unfair tax that needs to be stopped."

He predicted that seniors would use the tax cut to spend more money and improve the state's economy.

"I know it seems weird to cut taxes to bring more money in, but historically, if you look over the years at Reagan and Kennedy, that's exactly what happens," he said.

In a written statement, Blunt said the passage of the tax cut made it a "great day for Missouri seniors."

"The Social Security tax was a Social Security cut and today's action allows more Missouri seniors to keep their hard-earned money," Blunt said.

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 legislation 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, because their Social Security benefits would be taxed based on how much their income exceeds the $85,000 or $100,000 caps.

For example, a couple who earns $120,000 would pay taxes on $20,000 of their Social Security benefits, which is less than that couple would pay on the Social Security benefits under the current system. Conversely, a couple who earns $70,000 would not pay any taxes on their benefits.

The pension exemption would cover those who opt 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. But it would be capped at the maximum Social Security benefit.

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

Rep. Jeanette Mott Oxford criticized the legislation as "absolutely terrible tax policy" because it rewards people based on their occupation or age.

"You're a senior citizen, we like you, we're going to cut your taxes. You're a veteran, we like you, we're going to cut your taxes. You're a teacher, we like you, we're going to cut your taxes. You're a first-responder, we like you, we're going to cut your taxes," said Rep. Jeanette Mott Oxford, D-St. Louis.

The House's initial version of the tax cut would have been fully implemented in 2007 and would have cost at least $285 million. That bill exempted all Social Security benefits, some pensions and some retirement investments.

Jetton and some Democratic senators negotiated to reduce the tax cut and phase it in. Jetton said spreading the cost is particularly necessary because lawmakers on Thursday approved more than $100 million in other tax credits and incentives as part of a wide-ranging economic development bill.

Republican leaders estimate the slimmed down version would leave about 30,000 Missourians paying state income tax on their Social Security benefits.

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 Democrats also said lawmakers should not be cutting state revenue when there are health care and social service needs.

Rep. Clint Zweifel, who proposed an alternative tax cut, said he is disappointed that Jetton's plan will not give any tax relief to low-income people who were removed from the state Medicaid program in 2005.

The bill 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 to deduct their in-state property taxes from their income taxes.

Several years ago, lawmakers estimated the tax increase would bring in $11 million.

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Retirement tax exemption is HB444.

On the Net:

Legislature: http://www.moga.mo.gov