Missouri tax cut plan may be illegal

ST. LOUIS (AP) -- A key legislator says a measure to cut taxes on Social Security and other retiree benefits may be illegal.

The House Special Committee on Tax Reform endorsed the proposal Tuesday in Jefferson City, but chairman Rep. Bryan Stevenson later said the bill violated a 1989 U.S. Supreme Court decision that barred states from taxing some public pensions while exempting others.

Stevenson, R-Webb City, is working on amendments to fix the problems when the House debates the bill but told the St. Louis Post-Dispatch the changes could be costly.

The tax cuts are a priority of Republican Gov. Matt Blunt and House Speaker Rod Jetton, R-Marble Hill. The measure began as a way to eliminate state income taxes on Social Security benefits but has been expanded to cut taxes on retirement benefits for those not in the Social Security system, such as teachers and police.

But the U.S. Supreme Court, in Davis v. Michigan, threw out that state's practice of taxing federal pensions while exempting state and local pensions. The decision had ramifications in Missouri, but few current lawmakers were around then to be familiar with the issue.

Missouri also had taxed federal and private pensions while exempting state and local retirement benefits. After the ruling, the Missouri Supreme Court ordered the state to make refunds to federal retirees.

Sales and corporate income taxes were temporarily increased to cover the refunds, and the Legislature passed a law taxing federal, state and local retiree pensions equally.

This year's tax cut proposal would again treat some pensions differently. Stevenson, an attorney, said he determined the bill would violate the court ruling by cutting taxes for teachers covered by the Public School Retirement System but not for state workers in the Missouri State Employees Retirement System, and by cutting taxes for federal retirees covered by an old pension plan but not for those under a new system.

"We're either going to have to include all federal and all state (retirees) or we're going to have to exclude all federal and all state," Stevenson said.

Jetton had estimated the tax cut plan, as approved by the committee, would cost Missouri about $160 million. Stevenson said he did not know how much higher the cost would be if the tax break is expanded.

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Information from: St. Louis Post-Dispatch, http://www.stltoday.com