JEFFERSON CITY • The latest campaign to cut Missouri’s income tax stars a pig-tailed 5-year-old.
In commercials on YouTube and Kansas City cable television stations, the bouncy girl wants to know how Missouri is going to compete with Kansas when that state cuts business taxes in 2013.
Small businesses in Missouri must pay 6 percent of their profits in state taxes. Or they could move to Kansas and pay zero.
“What’s our plan?” the little girl asks. “You got nothing?”
The ad was paid for by a nonprofit organization linked to retired investor Rex Sinquefield of St. Louis, who has been trying to eliminate Missouri’s income tax for years. Now, the issue could finally get traction, thanks to the border war with Kansas.
Republican leaders say that when the Missouri Legislature convenes its 2013 session on Jan. 9, one item on the agenda will be a broad-based tax cut to encourage businesses to stay and grow here.
“Kansas has certainly raised the level of interest in moving forward on an income tax” overhaul, said incoming Senate President Pro Tem Tom Dempsey, R-St. Charles.
He says legislators will debate several versions of a tax cut, along with ways to replace the lost revenue.
Ray McCarty, president of Associated Industries of Missouri, said the state would actually lose more revenue if it did nothing to counter the Kansas tax break because businesses would leave. Those most likely to bolt, he said, include “high-tech firms, software companies, biotech, life-science companies — the kind of companies that we’ve really been trying to attract.”
But critics say that Missouri’s taxes are already low and that the state can’t afford a tax cut.
Missouri doesn’t fully fund its K-12 school-aid formula, has slashed college funding and lacks the money to rebuild crumbling highways and patch its frayed social safety net, the critics say. Far from being a panacea, they argue, Kansas’ tax cut will result in a huge budget hole that officials there are scrambling to plug.
“To emulate that is kinda like, if somebody jumps off a cliff in front of you, are you just gonna follow them?” said Jim Moody, a former Missouri budget director who is now a lobbyist.
Some legislators, too, are urging caution in tinkering with the tax code.
Rep. Kevin McManus, D-Kansas City, represents a district that borders the state line. He has seen businesses jump back and forth across the line.
“There’s a lot of different reasons companies locate in different states,” McManus said. “Taxes are probably part of the equation. We have got to look very carefully and do what’s fiscally prudent, given that we have to balance our budget.”
The Kansas law, signed in May by Gov. Sam Brownback, eliminated state income taxes for roughly 191,000 businesses that report company income on owners’ personal tax returns. That tax break is aimed at small businesses that are set up as limited liability corporations, S-corporations, partnerships and sole proprietorships.
Kansas also lowered individual income tax rates. Three tax brackets were collapsed into two, and the top rate was reduced to 4.9 percent from 6.45 percent. The lowest rate will be 3 percent, down from 3.5 percent.
To help offset the loss of revenue, Brownback had proposed axing some popular deductions and credits and leaving in place a temporary sales tax.
But negotiations faltered, and in an unexpected move, legislators passed the tax cut without the tradeoffs.
In taking the gamble, Kansas is banking on more economic growth flowing from the tax cuts over the long run. That is the heart of the pitch that has been made here by Sinquefield and supply-side economist Art Laffer, who once taught Sinquefield at the University of Chicago.
But Kansas is projected to face an $800 million hole in its budget next year and a several-billion-dollar shortfall over the next five years, prompting fears of deep cutbacks for schools and other basic services.
Brownback has said lawmakers need to find a way to help cover the gap.
Whether Kansas’ experiment boosts the economy or strips state services remains to be seen. But it could provide an incentive for Missouri businesses along the border to move west.
House Speaker Tim Jones, R-Eureka, said that when he visits Kansas City, people frequently tell him they’re considering moving.
“It almost pains them,” Jones said. “But they say, ‘How can I not take advantage of a 6 percent improvement in my margins by moving to Johnson County?’ ” in Kansas.
About 45,000 of Missouri’s 280,000 small businesses are situated in 11 counties that border Kansas, said Travis Brown, who lobbies for Sinquefield. If they lease office space, they could easily move across the state line when their leases expire, Brown said.
People already move from Kansas City, Mo., to the Kansas side of the metropolitan area for the schools, said Woody Cozad of Platte City, another Sinquefield lobbyist and a former Republican Party official.
The state boundary is “a two-lane blacktop road,” Cozad said. “It’s not like crossing the Mississippi River. It never crosses your mind that you’ve gone across the state line. It’s a nonexistent barrier.”
Cozad heads the nonprofit Better Government for Missouri, which is running the Kansas City ads. He said Sinquefield is among the nonprofit’s donors, though he is not the largest contributor. The group is not required to disclose its donors.
Sinquefield returned to his native St. Louis in 2006 after a successful career in the investment business in California. Since then, he has spent millions of dollars on donations to politicians and ballot measures, pushing for changes in the tax structure and public education.
Cozad said the nonprofit organization had “tried to stay out of what ought to be done, except to say it ought to be sufficiently structural” — a tax code change, not incremental incentive programs.
Several Missouri senators have filed bills as starting points for the tax debate. Some want to reduce the corporate income tax, while others would create a deduction for business income on individual tax forms.
Currently, Missouri’s corporate income tax rate is 6.25 percent, though the effective rate is lower because half of federal income tax payments can be deducted before computing taxable income.
Smaller businesses generally are taxed not under the corporate income tax law but on the income they “pass through” to the business owner. That means they pay at Missouri’s individual income tax rate of 6 percent.
Sen. Eric Schmitt, R-Glendale, has filed a bill that would phase in a 50-percent tax cut for all businesses — 10 percent a year for five years.
That plan is estimated to cost the state about $73.5 million the first year, according to Associated Industries of Missouri, which backs the bill. Schmitt said the cost would be offset by the benefits of keeping businesses in Missouri.
“This will grow our economy,” said Schmitt, who is expected to chair the Senate committee that will craft tax legislation.
Other lawmakers said a tax cut plan should include new revenue – for example, from closing tax loopholes. They say they don’t want to end up like Kansas did, with a gaping budget hole.
“Our members feel like Kansas may have gone too deep,” said Senate Majority Leader Ron Richard, R-Joplin.
Dempsey said taxing Internet sales should be “on the table as part of a greater package” to cut business taxes, because Missouri’s policy currently rewards out-of-state retailers.
Sen. John Lamping, R-Ladue, would reduce individual income taxes while raising sales and cigarette taxes. The net increase in revenue would go toward issuing bonds for highways.
Yet another plan, by Sen. Brad Lager, R-Savannah, would sharply reduce historic preservation and low-income housing tax credits and use those savings to fund gradual elimination of the corporate income tax.
In addition to facing opposition from developers, Lager’s approach troubles educators, who had hoped any tax credit savings would go toward public schools.
Lager called the tax cut a work in progress.
“There is definitely an interest in addressing what has happened in Kansas,” he said. “I don’t think anyone has the silver-bullet solution.”
About eight business groups plan to meet with Democratic Gov. Jay Nixon in a few weeks to discuss ways to stimulate the economy, including a potential tax cut.
Small-business lobbyist Brad Jones, the Missouri director of the National Federation of Independent Business, expects legislators to take a cautious approach rather than dive in without a plan to balance the budget, as Kansas has done.
“Given the fact that we do have a triple-A bond rating, we pay our bills and we balance our checkbook, I don’t think anyone’s going to want to do anything to jeopardize that,” he said.