Income tax cut, sales tax increase passed by Missouri Senate

JEFFERSON CITY, Mo. -- Disregarding objections from Democratic Gov. Jay Nixon, Missouri's Republican Senate passed a tax overhaul Tuesday that would cut income taxes by hundreds of millions of dollars annually while boosting the levy on sales.

The legislation is touted by supporters as the most dramatic change to Missouri's tax policies in decades. It is being prompted by a desire to compete with sweeping income tax cuts that took effect this year in neighboring Kansas.

Senators voted 23-11 Tuesday to send the legislation to the House, where Republican leaders also have proclaimed a desire to pare the state's income tax in favor of a higher sales tax. Senators passed the bill despite each receiving a letter Monday from Nixon urging them to vote "no" and citing the effect of a higher sales tax rate on seniors, veterans and families.

The core of the bill would reduce Missouri's income tax for individuals and corporations by three-quarters of a percentage point through five years while raising the state sales tax by one-half cent at the same time. A provision especially targeted at small businesses would allow people to deduct half the business income that gets reported on their personal tax returns. The bill also includes a section intended to benefit the poor by nearly doubling the personal tax deduction for people with adjusted gross incomes below $20,000.

"This is a policy shift that, in my opinion, is going to drive the economy up, and it's going to put money back in the hands of taxpayers and small businesses in this state," said the bill's sponsor, Sen. Will Kraus, R-Lee's Summit.

Opponents feared the tax cut could jeopardize funding for public schools and state services.

"This is the Show-Me State becoming the Me-Too State to be like Kansas," said Sen. Paul LeVota, D-Independence. "There's a race to the bottom that we're going to win against Kansas."

A Kansas law reduced individual income taxes, increased standard deductions and exempted the owners of 191,000 partnerships, sole proprietorships and other businesses from income taxes. As a result, Kansas now faces a projected budget shortfall of around $200 million for the fiscal year beginning in July.

The Missouri proposal is projected by legislative researchers to reduce state revenue by between $477 million and $670 million annually when fully implemented.

The not-for-profit Missouri Budget Project, which analyzes financial policies with an emphasis on their effect on the poor, estimates that the legislation would force $200 million in cuts to the budget proposed for next fiscal year and cost the state $960 million annually when fully phased in.

Basic state funding for Missouri's K-12 public schools already is $466 million less than called for by a state funding formula, and public colleges and universities are getting the same amount they did a decade ago despite growing enrollments.

Sen. David Pearce, of Warrensburg, who is chairman of the Senate Education Committee, was the only Republican to vote against the tax overhaul.

"That was just too much of a negative impact on public education in the state of Missouri," Pearce said.

While some Democrats cited the size of the tax cut for their opposition, Nixon focused his objections on the potential sales tax increase that he said would put "an additional strain on household budgets."

The legislation "shifts the tax burden away from corporations and the most affluent onto those who can least afford these added costs," Nixon said in his letter to senators.

An AP analysis of the tax plan conducted with the aid of a former state budget director found that it could save several dozen dollars annually for a Missouri family of four earning a little more than the state's median household income of about $45,000. Residents with higher incomes could save substantially more, particularly if they own their own business. But the legislation could result in a tax increase of several dozen dollars for some seniors, whose Social Security benefits already are exempt from state income taxes but who would still pay the higher sales tax.

Republicans said the plan would benefit virtually everyone and could spur so many businesses to expand that the resulting tax revenue ultimately would offset the lower income tax rate.

"We want more businesses to come here. We want fewer businesses to leave here," said Sen. Eric Schmitt, R-Glendale. "This isn't about the 1 percenters, this is about the middle-class."

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Tax overhaul bill is SB26.

Online:

Senate: http://www.senate.mo.gov

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