Utility exemption

By Ray McCarty

I represent Associated Industries of Missouri, the group that has taken the lead in asking the Missouri Legislature to approve the manufacturing sales-tax exemption that is the subject of your April 11 article "County seeks deal to protect tax base."

I thought you may be interested to know that the Taxpayers Research Institute of Missouri has estimated the impact of the exemption statewide at only $8.5 million to state funds and about $3 million to local funds, based on U.S. Department of Commerce data. We have also estimated the impact to Cape Girardeau sales-tax revenue (less than $50,000) and Cape Girardeau County sales-tax revenue (less than $27,000). The federal data includes data specific to the Cape Girardeau area that allowed us to make an accurate estimate of impact to your local governments.

Your article cites a $46 million impact to state and local governments resulting from this exemption. I assume you obtained that figure from the fiscal note for the bill, but the authors of the fiscal note said they were unable to use that estimate because it did not take into account the fact that nearly all electricity usage is already exempted under current law from sales and use taxes. Here is a quote from the fiscal note: "Officials from the Department of Revenue stated there currently is an exemption under Section 144.030.2 (12), which companies have to qualify for. The DOR assumes this new section in statutes would expand this exemption and make it easier to qualify for. The DOR could not provide an estimate of the loss of revenue from this section of the proposal. Since some of the energy used in the manufacturing of a product is already exempt from sales tax, Oversight will not be able to utilize the estimate provided by BAP or calculate an estimate based on information provided by the Statistical Abstract of the United States. Therefore, Oversight must simply assume an unknown amount of loss in revenue to the state and local political subdivisions from this section."

An additional factor that is not anticipated in the estimate by the Office of Administration is the amount of utility usage that is consumed in "industrial processes" but not necessarily used in manufacturing. We were able to determine the amount of manufacturing utility usage based on federal data and we estimated the part that is exempt under current law at 85 percent because nearly all of the electricity used in these processes is already exempted. Under the sales-tax exemption in current law, companies need only prove that electricity represents more than 10 percent of their total production costs or that they use raw materials containing more than 25 percent recovered (recycled) materials. Most companies that use large quantities of electricity qualify under this existing exemption.

Gas and other utilities used in manufacturing do not enjoy the same exemption under current law, which is a main reason we have pursued this exemption for the last two years. Because the end product is taxed, all inputs into manufacturing the product should be exempt to avoid double taxation. The legislature recognized this fact for processes that use electricity, but not gas or other utilities.

Another main reason Associated Industries of Missouri is pursuing this exemption is due to the impact the exemption could have on decisions by Missouri manufacturers when considering where they want to locate new production facilities or lines. The bill would help Missouri's ability to attract and retain good paying manufacturing jobs at manufacturing facilities in Missouri and help our state and local officials fend off stiff competition from states like Kansas that already have an identical exemption. In the Cape Girardeau area, an example has been cited of a new processing line (and more than 300 jobs) that could have been added recently to a local manufacturing facility in the Cape Girardeau area, but instead was sent to another state. If this exemption had been in place, perhaps the local plant in your area may have been able to better compete for that processing line.

Manufacturers across Missouri face ever-increasing pressure to generate profit, while lower labor costs and tax incentives available in other states and other countries are giving our competition in those other states and countries an advantage in the marketplace. We see the results of this fierce competition frequently as companies move to other states, choose to locate new manufacturing lines in other states or simply close because they are not able to compete. The complete sales-tax exemption of manufacturing inputs, while representing a modest cost to the state and local governments, would help Missouri manufacturers compete in the global marketplace. Without the need to meet the 10 percent threshold or use a certain percentage of recycled raw materials, companies would be able to rely on the exemption when calculating the costs of doing business in Missouri versus any competing state or country.

Finally, your article mentioned your local government officials question whether the state has the ability to exempt items from their local sales tax. In fact, local governments' ability to impose local sales taxes is granted by the state legislature (see Article X, Section 1 of the Missouri Constitution). When the authority for local governments to enact a sales tax was granted by the state, the local sales tax base was aligned with the state tax base so it would be uniform. When an item is exempted from the state tax base, it is also exempted from the local sales tax base, except in rare instances when the state has allowed the local governments to continue to impose their local taxes. You will find the requirement that local governments use the same sales tax base as the state in section 32.087, subsection 8, RSMo, which states: "All exemptions granted to agencies of government, organizations, persons and to the sale of certain articles and items of tangible personal property and taxable services under the provisions of sections 144.010 to 144.525, RSMo, as these sections now read and as they may hereafter be amended, it being the intent of this general assembly to ensure that the same sales tax exemptions granted from the state sales tax law also be granted under the local sales tax law, are hereby made applicable to the imposition and collection of all local sales taxes imposed under the local sales tax law."

Ray McCarty is the executive director of the Taxpayers Research Institute of Missouri, an arm of Associated Industries of Missouri, in Jefferson City, Mo.