JEFFERSON CITY • A $700 million package of income tax cuts cleared the Missouri Senate on Wednesday and appeared headed for passage in the House, putting the Republican-led Legislature in line to pass one of its top priorities before the session ends next week.
The Senate passed the bill on a mostly party-line vote of 24-9 after Democrats gave up trying to filibuster it. If the House follows suit as expected, the bill’s fate will be up to Gov. Jay Nixon, a Democrat.
Nixon issued a cryptic statement, saying: “If the bill makes it to my desk, I will give it a thorough review and assess its impact on vital public services.” Though he held a news conference on a separate topic, he refused to take questions from reporters.
Republicans said cutting taxes will stimulate the economy and help Missouri compete with Kansas, which eliminated taxes on many small businesses last year.
“If we don’t do anything, it’s naive to think a small-business owner, particularly a high-tech company that’s in a short-term lease, isn’t going to make a decision to save 6 percent” by moving across the border and avoiding Missouri’s personal income tax, said Sen. Eric Schmitt, R-Glendale.
The centerpiece of the Missouri bill is a 50 percent tax cut, phased in over five years, for businesses that “pass-through” their income to the owner’s personal return.
The bill also would drop the top personal income tax rate by one-half of a percentage point, to 5.5 percent. The corporate tax rate would fall by 3 percentage points, to 3.25 percent. Those cuts would be phased in over 10 years.
Originally, Republicans planned to replace some of the lost revenue with a half-cent sales tax increase.
But they dropped that idea after Nixon said it hurt older Missourians on fixed incomes. Some House Republicans also balked at a sales tax increase, and their resistance would have left the GOP without a veto-proof majority.
Even so, the bill could produce more sales tax revenue, because it would require Missouri to tax online sales if Congress passed the Streamlined Sales Tax Act. In that case, additional state income tax cuts also would kick in.
Supporters called the latest version of the bill a modest approach that phases the cuts in slowly and won’t blow a hole in the state budget as the Kansas tax cut is threatening to do.
“It is a smaller tax cut,” said Senate President Pro Tem Tom Dempsey, R-St. Charles. “It has protection in it.”
Democrats questioned whether cutting taxes will stimulate growth. They said Kansas’ approach is unproved and companies look for educated workers, modern highways and other services that Missouri will be unable to afford if revenue dips dramatically.
When it is fully implemented, the tax cut could reduce state revenue by an estimated $700 million a year, according to an analysis by legislative staff. The tab could be closer to $817 million a year, say analysts for the Missouri Budget Project, which lobbies for lower- and moderate-income people.
As a Senate committee examined the fiscal note on Wednesday, Sen. Paul LeVota, D-Independence, said: “This is a pretty big chunk, and not a very responsible move.”
Supporters responded that each year, some of the tax cuts would kick in only if state tax receipts grew by $100 million compared to the highest of the three previous years.
In other words, “the treasury has to be growing,” said Sen. Ryan Silvey, R-Kansas City. “It just wouldn’t be growing as fast” as it would without the tax cut.
In fact, the $100 million in growth wouldn’t even cover inflationary increases in mandatory expenses, such as Medicaid.
One of the biggest unknowns is how the new deduction for business income would work. Opponents said the bill left the definition of business income vague, causing confusion about whether, for example, farm income would qualify.
The provision could become a tax dodge, with businesses reorganizing to claim the break.
Amy Blouin, who lobbies for the Missouri Budget Project, said if her organization made its employees into consultants, “we’d all get that 50 percent tax cut.”
Opponent Jim Moody, who lobbies for the Civic Council of Greater Kansas City, said at a hearing last week that because his consulting business is structured as an LLC, he would get the 50 percent cut, too.
“You’re going to give individuals a nice tax break, particularly if they’re upper-income,” he said. “I don’t see how that creates any jobs.”
On Tuesday, opponents tried to stall a vote. Senate tradition allows senators to hold up bills by talking as long as they wish, and freshman Sen. Jamilah Nasheed, D-St. Louis, tried that route.
Nasheed led a six-hour filibuster but gave up the floor around midnight. She said her Democratic colleagues backed off when Republicans signaled they would retaliate by forcing votes on other hot-button bills, such as one requiring voters to show state-issued photo IDs.
“I can do five, six, seven hours, but at the end of the day, I don’t think I have the support to keep up the fight,” Nasheed said.
In the end, one Democrat — Ryan McKenna of Jefferson County — voted with supporters of the bill, while one Republican — David Pearce of Warrensburg — joined those opposing it.
Schmitt, who handled the bill, said he is hopeful that Nixon will sign it. The senator noted that Nixon signed a bill ending the corporate franchise tax several years ago.
And if Nixon vetoes it?
Schmitt said he was optimistic that Republicans could muster the two-thirds votes needed in each chamber to override a veto during the September override session.
The bill is HB253.