This article first appeared in the St. Louis Beacon: State Sen. Eric Schmitt, R-Glendale, expects to be in a good mood this weekend, now that the core of his proposal to cut state business taxes is part of a broader bill that has won first round approval in the state Senate.
“It’s a pretty sweeping reform of the state tax code,’’ Schmitt said, adding that he believes Missouri is on track to see the biggest income tax changes since 1929.
But a rival in the likely losing camp -- state Sen. Jamilah Nasheed, D-St. Louis – isn’t happy about it. She fears the bill guts state revenue and will lead to massive cuts in already lean state programs.
“I truly believe it will be devastating to the state of Missouri,’’ Nasheed said.
The Senate voted Wednesday night in favor of SB26, which calls for phasing in over five years a reduction in the state individual and corporate income taxes. The state’s individual income tax rate of 6 percent would be cut to 5.25 percent; the corporate tax would go from 6.25 percent to 5.5 percent.
Final Senate approval is expected next week, which will send the measure to the state House, which also is in a tax-cutting mood.
As Schmitt has sought, the bill also creates a new individual income tax deduction for business income. At the end of the five-year phase-in period, the deduction would amount to 50 percent of the business income.
The bill also would allow a $2,000 deduction for taxpayers who earn less than $20,000.
In exchange, the state’s sales tax would increase to 4.725 percent from the current 4.25 percent.
The bill also calls for taxing internet sales, which advocates say would bring in more tax money while making the marketplace fairer for Missouri businesses who now lose business to out-of-state businesses that don’t collect state sales taxes.
What concerns Nasheed is the bottom line. Schmitt and other backers of SB26 estimate that, when fully phased in, the bill will reduce state income by at least $450 million a year.
The Missouri Budget Project, a progressive advocacy group, contends that the annual cut would be closer to $700 million a year.
But Schmitt says he’s confident that, in the long run, the bill will attract more business and add more taxpayers to Missouri’s rolls. “I believe this will grow our economy. I believe we will expand our tax base, we will have more taxpayers, and a lower tax rate,” he said. “I think this puts us on a different path to prosperity.”
Nasheed isn’t so sure. And neither is Gov. Jay Nixon, who has signaled that he’s cool to SB26, particularly the provision increasing the state’s sales tax. (The governor can sign or veto the bill; if he does, Republicans will need 109 votes in the House and 23 in the Senate to overrule him.)
Kansas blamed for Missouri tax-cut focus
Nasheed contends that the loss to the state budget will be closer to $1 billion a year, and that the proposal shifts the tax burden from the haves to the have-nots.
Backers acknowledge that the Senate tax-cut bill is in part a response to massive tax cuts in Kansas, which some in western Missouri believe has contributed to an exodus of businesses from Missouri to Kansas.
But Nasheed and her allies note that Kansas already is experiencing huge budget problems and having to make spending cuts to account for state government’s reduced income. Kansas Gov. Sam Brownback, a Republican, believes the cuts will eventually spur more growth.
In Missouri, critics of SB26 contend that the GOP backers' real aim is to do away with the state’s income tax and replace it with higher sales taxes.
That’s the aim of some major campaign donors in the state, most notably financier Rex Sinquefield, who largely bankrolled a scuttled effort in 2012 to ask Missouri voters to make the switch from an income tax to a sales tax. Sinquefield and allied groups, notably the Show-Me Institute, have cited the economic success in states such as Texas and Florida, that don’t have income taxes.
Backers of the proposed switch have acknowledged that so far the public isn’t keen on the idea. The Budget Project, among others, say the change shifts the tax burden from the wealthy to the poor.
But Sinquefield and his allies believe that the public will come around if it has more information – or sees success in tax-cutting states like Kansas.
Schmitt said he believes that SB26 offers a thoughtful, moderate approach for making some changes in the state’s tax code and then using the phase-in period to determine whether the tax cuts are proving successful.
He is banking that they will. Nasheed is convinced that they won’t. And Nixon will likely find himself in the middle.