Missouri’s legislature is in veto session today, holding override votes on a number of bills vetoed by Governor Jay Nixon (D). Among them is House Bill 253, the state’s first income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cut in 90 years. As we covered when the legislature enacted it, the bill would:
- Lowers individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. top rate from 6 percent to 5.5 percent over ten years and reduces the number of brackets from ten to nine. The rate would go down an additional one-half percentage point if Congress enacts the Marketplace Fairness Act.
- Reduces the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from 6.25 percent to 3.25 over the next decade.
- Enacts a 50 percent business pass-through income deduction between 2014 to 2018, and
- Increases the personal income tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. for low-income individuals in 2014.
The bill would reduce revenue by approximately $700 million (it’s hard to calculate, given the moving parts), although the phased-in reductions are only triggered if revenue exceeds the size of the cut. Governor Nixon is rallying support to sustain his veto, saying the bill is “dramatically defunding education.” An allied legislator speaking on the floor just said the tax cuts are “massive.” The New York Times editorial board today called the cuts “ruinous.” (They also strangely said that cutting taxes during a weak economy is “a losing strategy.”)
Interestingly, both sides are framing the debate in terms of economic growth. The Governor and his allies say education (well, technically, spending money on education) is what matters for economic growth. The legislative proponents say that tax and regulatory climate is what matters for economic growth. Obviously, they’re both important, so a lot of the rhetoric is over-the-top. All told, Missouri spends $13.7 billion on education ($3.6 billion on higher education, $9.4 billion on K-12), and while I’m not a Missouri legislator, it’s comes across as over-the-top to me to say a half-point income tax cut phased in glacially over ten years will destroy all that.
There’s also quite a few legislators attacking provisions of the bill that centralize sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. administration and eliminate sales tax carveouts on a number of items (“it’s a tax on textbooks!”); one Republican on the House floor is gleefully pointing out that is something that most Democrats co-sponsored as recently as this legislative session. (“I didn’t know that was in there,” weakly replied one Democrat on the floor.) The list of local sales taxes runs 53 pages, so it’s unfortunate that some are demonizing this worthy and formerly bi-partisan administrative change.
That said, the bill is not perfect. The bill does nothing about the state income tax’s ten tax brackets that top out at just $9,000. That a minimum-wage earner has already gone through ten tax brackets is absurd, a relic of 1931 when the law was first past. The bill also creates a new 50 percent income tax carveout for business income, a problematic trend started in neighboring Kansas. Ten years is a long time to phase in tax changes, creating uncertainty about what the law will be.
Missouri is not a high-tax state, but it’s in a low-tax region and that can’t be forgotten. The economy is not doing well, and even if education was the silver bullet, that will take a generation to manifest itself. Regardless of what happens today in the veto session, I hope Missouri legislators don’t give up working for a better state tax system.
UPDATE: Tax reform bill veto override failed 94 to 67 (needs 109 to override).
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