House expands tax cuts on retirement benefits

JEFFERSON CITY, Mo. -- A proposal initially designed to help retirees by cutting the state's income tax on Social Security benefits and pensions now includes all Missourians -- regardless of age.

The initial plan would have covered, for those who are at least 65 years old, the Social Security benefits, teacher pensions and pensions from police and fire departments that opted out of Social Security. That would result in an annual loss of $130 million in state tax revenue.

Lawmakers added an additional $100 million to that Wednesday by expanding the exemption from the state's income tax to include up to $6,000 worth of interest and capital gains. To qualify, that money would need to be used for retirement income.

The bill also was amended Wednesday to drop the age limit, meaning people who retire before age 65 would receive the tax breaks, as would anyone receiving Social Security survivor or disability benefits. It was unclear how much money the state would lose as a result of that change.

Lawmakers considered expanding the tax cuts even further but balked when the estimated cost topped $350 million annually.

'The haystack'

"This is not the straw that will break the camel's back. This is the entire haystack that will crush the camel," said Rep. Bryan Stevenson, R-Webb City.

The House did not vote Wednesday on the underlying legislation and is likely to continue debating the bill today.

House Speaker Rod Jetton, who is sponsoring the bill, said the state's retirees deserve some help. He predicts that cutting taxes on retirement benefits will attract people to Missouri and thus boost state revenue.

"It doesn't seem that it's fair to pay taxes twice on the same money," said Jetton, R-Marble Hill.

Missourians' whose income, minus half 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. Most Missouri seniors fall under these income thresholds.

Critics, which include Missouri AARP, the Missouri Catholic Conference and some social services advocates, say that the state should be using the money to turn back cuts to state programs that have been made in recent years.

Davis v. Michigan

Another potential roadblock for the proposal is a 1989 court case. The U.S. Supreme Court, in Davis v. Michigan, threw out that state's policy of exempting state and local pensions but taxing those from the federal government.

After the ruling, the Missouri Supreme Court forced the state to give refunds to federal retirees.

Stevenson, an lawyer who heads the committee that approved the tax cut plan, said that the courts require equal tax treatment of pension plans unless there is a sound reason. He said lawmakers have that reason because the pension plan benefits that would be made tax exempt under the bill are the only pensions that are provided in place of Social Security benefits.

Democratic critics have said a better tax cut for seniors would focus on their property taxes.

Rep. Clint Zweifel said that lower income taxes have tended to mean higher property taxes in other states. For example, Washington -- which has no state income tax -- has an average property tax rate that is 30 percent higher than in Missouri.

Zweifel, D-Florissant, said increasing a state income tax credit based upon how much is paid in property taxes, establishing an earned income tax credit based on the existing federal model, plus a more modest Social Security benefits income tax exemption would cost the state about $114 million and better target the taxes.

Zweifel's proposal would increase the eligibility level for the property tax credit from $25,000 to $30,000 for one person and $27,000 to $34,000 for a couple. It would also exempt Social Security benefits for singles earning less than $40,000 and couples earning less than $50,000.