Tax shuffle could shake up Missouri

It would be the biggest change in the tax code in decades and the first step toward political mega-donor Rex Sinquefield’s goal of moving Missouri to a system that taxes consumption rather than income.

But Nixon, a Democrat, signaled last week that he would veto the bill. The governor repeated his position that the plan would shift the tax burden from corporations to seniors on fixed incomes and “is not the right approach to growing our economy or creating jobs.”

What’s more, if Republicans were hoping to override a gubernatorial veto, those hopes were dimmed last week when 19 Republican House members balked at the bill. The 90-68 vote fell 19 votes short of the two-thirds majority that would be needed for an override.

“I’m not one of those people who is too anxious to change the way things are going, especially when it comes to raising sales tax and barely reducing income tax,” said Rep. Don Phillips, R-Kimberling City, and one of the opponents.

Those dynamics could set the stage for negotiations with Nixon as the Legislature heads into the final three weeks of the legislative session. The bill’s sponsor, Sen. Will Kraus, R-Lee’s Summit, said that although he was happy with the House version of the measure, he was open to changes that could help win Nixon’s support.

With the May 17 adjournment date looming, Kraus said he hoped to take up the bill today after giving fellow senators the weekend to look over the House changes.

“My goal is to get something across the finish line, have the governor sign it and have some major impact for the state of Missouri on tax policy,” Kraus said.

SINQUEFIELD STARTED DEBATE

Though he’s playing a behind-the-scenes role, Sinquefield moved the issue to the front burner.

About seven years ago, he retired from his investment company and returned to his native St. Louis from California. He began making five- and six-figure political donations to advance his ideas to revamp the tax code and public education.

The drive for a tax cut picked up steam this year, after Kansas eliminated taxes paid by many small business owners.

Sinquefield helped finance a group called Save Missouri Jobs, which aired television and Internet spots calling on legislators to come up with a strategy to keep Missouri employers from moving across the state line.

Though they say they didn’t draft it, Sinquefield’s lobbyists have been working the Capitol’s hallways for the Kraus bill.

“It’s progress,” said Woody Cozad, a former Missouri Republican Party official who represents Save Missouri Jobs. “We’re for anything that makes the state more business-friendly, especially for small business.”

As passed by the House, the bill would gradually cut the top personal income tax rate by two-thirds of a percentage point, to 5 1/3 percent. The Senate version of the bill contained a slightly larger tax cut.

In both bills, small businesses that “pass through” their income to the owner’s personal return would get a phased-in 50 percent tax cut. Also, the corporate tax rate would drop by three-quarters of a percentage point, to 5.5 percent, and the first $25,000 in income would be tax-free.

To partly offset the revenue loss, the state sales tax would rise. The House increased it by six-tenths of a percentage point while the Senate called for five-tenths of a percentage point. The current state rate is 4.225 percent, including levies for conservation and other projects.

The new sales tax money would be earmarked for public schools, the state road fund and a new mental hospital in Fulton.

As proponents note, Missouri’s sales tax would still be lower than most neighboring states’. But that comparison doesn’t take into account local tax rates. For example, a recent Tax Foundation study found St. Louis’ 8.49 percent base rate ranked 25th among the nation’s 108 biggest cities.

The proposed changes would be phased in over five years, but each step would take effect only if state revenue grew by at least $100 million, compared with an average of the three previous years. The bill also would take steps aimed at taxing online sales and would waive penalties owed by tax scofflaws, to get them to pay up.

Compared with the Kansas tax cut, which many have called drastic, supporters say the Missouri plan is modest.

“It doesn’t move as far or as fast as many of us would like,” said Sen. Brad Lager, R-Savannah.

REVENUE ESTIMATES VARY

Legislative staffers estimate the bill would reduce state revenue by $438 million by 2019, when the bill is fully in effect.

Kraus contends that normal growth — along with an economic spurt prompted by the bill — would offset the loss.

“If you look at Oklahoma, they did it, and they had positive revenue impact,” he said.

Opponents contend state revenue could plummet by nearly a billion dollars when the bill is fully in effect, forcing deep cuts in services. The Missouri Budget Project, which advocates for low- and moderate-income people, came up with that estimate.

The critics say legislators would be unable to fix the budget hole because the Hancock Amendment requires voter approval of any tax increases that would put the state over a constitutional revenue lid.

“That’s a very serious thing to think about, because if this is a mistake, we are stuck with this mistake for a very long time,” said Rep. Margo McNeil, D-Florissant.

The House attempted to meet some of the objections by, for example, earmarking most of the sales tax increase for public schools. But groups representing school teachers and administrators remain opposed, saying that legislators could simply use the new revenue to replace general revenue that schools now receive.

Freshman Rep. Elaine Gannon, R-De Soto, bucked the chamber’s leadership and voted against the bill. “I feel like it could take money away from education, and I’m a retired school teacher,” she said in an interview.

Earmarking money for highways also raised concerns.

Some highway construction supporters said it would complicate their goal of seeking voter approval of a much bigger funding boost — a penny sales tax devoted solely to highways for 10 years. That Senate-passed plan is pending in the House.

“I’m a little worried that (opponents) could use this proposal as a talking point to say, ‘We fixed the transportation problem,’ ” said Sen. Mike Kehoe, R-Jefferson City. “It doesn’t fix the transportation problem.”

Not only would the proposal raise a fraction of the $8 billion that transportation supporters want, it would be an uncertain source of income because the tax changes are triggered only if revenue grows by a certain amount, he said.

BUSINESS REVIEWS MIXED

The Missouri Chamber of Commerce praised the House bill, calling it a bold step and “the largest tax cut for Missouri businesses in history.”

States such as Kansas, Oklahoma and Tennessee are growing because they “don’t tax productivity,” said chamber President Dan Mehan.

But even some pro-business Republicans were skeptical. Rep. Noel Torpey, R-Independence, said in an interview that the Kansas tax cut was unproven.

“In Missouri, we’re the Show-Me State,” said Torpey, who voted against the bill. “Show me that it works. I’m not convinced.”

And while the tax cut has been a hot issue in Jefferson City, it hasn’t been much of a priority for St. Louis area business groups.

The St. Louis Regional Chamber said it was taking no position on the matter, preferring to focus its legislative efforts on a broader economic development bill, transportation funding, workers compensation laws and Medicaid expansion.

“We are focused on these issues and hope our leaders will take positive action on all four,” said a statement from the chamber. “They are the most important issues for job creation today.”

Greg Prestemon, president of the Economic Development Center of St. Charles County, said most of the businesses he talked with about expanding on his turf were more concerned about other things, such as workforce, real estate and transportation.

“I understand the Legislature wanting to have a competitive tax system, but I think the state income tax probably is neither a big attractor nor deterrent at this point,” Prestemon said. “I can’t think of a single instance where a company said, ‘Your taxes are too high.’ ”

(The bill is SB26.)

Tim Logan of the Post-Dispatch contributed to this report.