Lawmakers to consider exempting federal refunds from state tax

JEFFERSON CITY, Mo. -- Roger Flowers has spent the past few weeks removing asbestos from the Senate chamber. Now he hopes lawmakers will remove the need for him to pay state taxes on his federal tax refund.

Flowers, who has been working on Senate chamber renovations, said he would prefer to keep all of his $300 refund check, instead of paying a portion of it in state taxes.

"I prefer that they wouldn't tax it but if they do, I guess that's fine" said Flowers, 52, who has not yet received his refund. "That's the way government works."

Lawmakers returning to work Wednesday for a special session are to consider whether refunds authorized by a tax cut backed by President Bush should be exempt from state taxes.

Gov. Bob Holden supports exempting the refunds of $300 to $600 from state income tax, a position most lawmakers seems to support in order to please constituents who feel they are already overtaxed.

But if the Legislature fails to act on the measure during the special session and the refunds are taxed, it would mean income tax increases of $18 per individual and $36 per couple.

That's because the Missouri income tax code -- and those of seven other states -- treats federal income taxes as a deduction. With lower federal taxes, there is less to deduct from state taxes, meaning a higher state tax bill.

During the state fiscal year that began in July, Missouri government would take in $29.1 million in new taxes because of the federal tax refund, according to Holden's budget office.

Sen. Wayne Goode, D-St. Louis, who serves on the Senate Budget Committee, said he is concerned that an exemption could set a dangerous precedent but is unwilling to battle the issue.

'Swimming upstream'

"At this point it might be swimming upstream. It may all be settled," Goode said. "Every year many taxpayers overpay, and when you get it back it becomes taxable on next year's return. It just made sense to treat this the same way, particularly when you consider the revenue situation facing the state."

Holden has withheld $358 million from this year's budget because of a slowing economy. Any influx of money could be used to restore part of that spending.

Republican House Leader Catherine Hanaway of Warson Woods said she is concerned that opening up a section of law on taxes to include the federal refund exemption could mean other changes as well.

"There is a risk that when you open up the tax code ... you can open it up to a variety of issues," Hanaway said.

Hanaway said the possibility exists that some may seek a tax increase once the bill is open for debate to help bolster the state against a weakening economy.

Holden said he would consider only the tax refund issue.

"I think it's very important that we keep the special session to a very narrowly defined set of issues," Holden said. "The sense I get is that the Legislature wants to get in, get the business taken care of, and go home, that's my desire to."

Goode for years has warned that continued tax breaks would result in tight budgets. Since 1995, Missouri lawmakers have cut taxes by $753 million, according to Holden's budget office. But Goode said he would be wary and proposing tax increases.

While increasing taxes might sound appealing to some, Goode said it would take a lot of time to draw a proposal that makes sense.

"To increase revenue you need to put together a consensus," Goode said. "I don't think anybody is going down to Jefferson City to vote for tax increases."

Also being considered during the special session is a measure to revamp a prescription drug plan for elderly Missourians and revisions to a livestock pricing law.