Missouri planning to tax refund checks

JEFFERSON CITY, Mo. -- By now, most people have probably heard that the federal government is mailing families $400 for each child in their home -- an advance refund on their 2003 taxes. What most Missouri residents may not realize is that the state government will demand families pay $24 of that back in taxes.

Because of the way Missouri's tax code is tied to the federal one, a tax break from Washington automatically means a tax increase from Jefferson City -- unless state lawmakers choose to create an exception.

Two years ago, when the federal government mailed out similar midsummer tax refund checks, that's exactly what happened. Missourians got to bank the full check.

Already budgeted

But this time, the state intends to take its share. In fact, politicians already have budgeted the $12 million in additional state tax revenue that the federal checks will generate.

The main reason for the inconsistency is that the state's budget troubles are perceived to be worse than two years ago. And like the families receiving the federal rebates, state government will gladly take any money it can get.

The scenario two years ago was this:

President Bush pushed through Congress a massive tax cut plan that he signed into law in early June. Among other things, it included summer tax rebate checks of up to $300 for individuals or $600 for couples -- an advance payment reflecting a change in the tax brackets.

Because federal taxes of up to $10,000 can be deducted on state income taxes, the federal refunds would have meant smaller state deductions and thus higher state taxes. At a typical state income tax rate of 6 percent, an individual would have paid an additional $18 and a couple $36. The state, meanwhile, would have gained $29 million in taxes from the checks.

Republican state legislators quickly expressed outrage, and Democratic Gov. Bob Holden added the tax rebate issue to a special session already planned for September. Lawmakers passed a one-time exception to the tax code by a three-fourths majority.

The scenario this time is as follows:

Bush again has convinced Congress to pass a large tax cut plan that he signed into law in late May. Among other things, it includes summer tax rebate checks of up to $400 for each dependent child.

Because Missouri's tax code is still linked to the federal one, the federal refunds again would mean smaller state deductions and thus higher state taxes. At a typical state income tax rate, a family would pay an additional $24 per child in state taxes.

But this time, there is no outrage from lawmakers, and Holden is not adding the tax rebate issue to a special session similarly planned for this September.

Two years ago, Holden proclaimed that taxpayers deserved to keep their full federal refunds, which were promoted by politicians everywhere as a way to stimulate the economy.

"The taxpayers feel like I believe, that this is their money," Holden said in 2001.

But "the budget situation is significantly worse now," Holden spokeswoman Mary Still said Friday, the day the federal government began mailing this year's refund checks. Plus, this year's federal tax cut has a greater effect on the state budget, she said.

Net loss of $95 million

Although the child rebate checks will generate $12 million for the state, other provisions in the federal law will result in a net loss of $95 million in state taxes, said Holden's budget director, Linda Luebbering.

By comparison, the net effect of the 2001 tax provisions would have been an $8 million gain in the first state fiscal year, with large losses coming in following years, she said.

Cumulatively, federal tax changes during the past three years are expected to cost the state more than $240 million this fiscal year, Luebbering said. Exempting the latest federal rebate checks from state taxes would only swell that number and lead to more budget cuts -- likely from education, Luebbering said.

But the Democratic governor is not the only one reversing course from two years ago.

In 2001, Republican Rep. Catherine Hanaway, then the minority party leader, issued a news release the day Bush signed the tax cut plan, proclaiming: "Hanaway says state should keep its hands off federal income tax rebate."

A similarly bold statement came from Sen. Michael Gibbons, then chairman of the Senate Ways and Means Committee which handles tax issues.

"This is a matter of principle," Gibbons declared in 2001. "It's ridiculous to ask people to pay a tax on money they are receiving as the result of a tax rebate."

Neither Gibbons (now the Senate majority floor leader) nor Hanaway (now the House speaker) has publicly called for this year's federal rebate checks to be exempt from state taxes.

Hanaway was out of the state last week and unavailable for comment.

Gibbons, when asked about his silence, said lawmakers have been "distracted" by Holden's vetoes of various bills and a special session on the budget. Like Holden's staff, he also cited the expectation that this year's federal tax package will have an overall negative effect on state revenue and positive effect on Missouri taxpayers.

Gibbons isn't too keen on another special session, but he said state politicians should consider whether to once again exempt the federal rebate checks from state taxes.

"I think we've got to look at it if we're going to be philosophically consistent," Gibbons said.

On the Net

Tax Rebates: www.taxes.com/federal_tax_rebate.htm