JEFFERSON CITY – Missouri's Republican-led Legislature enacted the state's first income tax rate reduction in almost a century Tuesday by overriding the veto of Democratic Gov. Jay Nixon, who has denounced it as a reckless financial experiment.
The law will gradually cut Missouri's top individual income tax rate starting in 2017 and make the state just the third in the nation to offer a special business-income deduction on personal tax returns. But the incremental tax cuts will occur only if Missouri's revenues keep growing.
The tax cuts could benefit about 2.5 million individuals and families, with the wealthiest standing to gain the most, and would provide an extra boost to hundreds of thousands of people involved in business partnerships, limited liability corporations or their own ventures.
The override vote capped an intense, multi-year campaign that included millions of dollars of advertising by tax-cut supporters and scores of opposition events organized by Nixon. Republicans made the tax cut a priority after failing last year to override Nixon's veto of a more expansive cut.
The GOP holds large majorities in both chambers but needed a little Democratic help to accomplish the two-thirds vote required to override this year's veto. The House voted 109-46, with Democratic Rep. Keith English of suburban St. Louis joining all 108 Republicans. The GOP-led Senate voted Monday to override the veto on a party-line 23-8 vote.
Republicans cheered and House Majority Leader John Diehl raised his arms in victory as the override vote passed.
"Missouri is now truly saying we are open for business and ready to grow," House Speaker Tim Jones said.
Like colleagues in other states, Missouri Republicans touted the tax cut as a means of remaining competitive with their neighbors and boosting the economy as revenues rebound from the Great Recession. But the tax-cutting trend has not been limited to Republican states. About a dozen states passed income tax cuts last year and at least half that many already have voted to cut income taxes this year, including Democratic-led New York and Republican-led Oklahoma.
When he vetoed the Missouri measure last week, Nixon raised concerns that it could jeopardize funding for essential state services while providing a much larger benefit to the rich than the poor. He described it as "an unfair, unaffordable and dangerous scheme that would defund our schools, weaken our economy, and destabilize the strong foundation of fiscal discipline" in Missouri.
Nixon said in a statement Tuesday that the tax cut fails to protect public education and "remains a very real threat to the principles of fiscal discipline."
Economists at the University of Missouri have estimated that the tax cut will eventually reduce state revenues by $620 million annually. But Nixon asserted it could punch a $4.8 billion annual hole in the state budget. He contends the bill's wording could be interpreted to eliminate taxes on all income over $9,000, though Republican legislative leaders have called that "absurd."
The new law is designed to gradually reduce Missouri's top individual income tax rate – currently charged on all income over $9,000 – from 6 percent to 5.5 percent. It also phases in a new 25 percent deduction for business income reported on personal tax returns. Each incremental cut would occur only if state revenues grow by at least $150 million over their high mark from the previous three years.
It also increases a tax deduction for low-income residents and makes annual adjustments to Missouri's tax brackets based on inflation, which could effectively result in perpetual tax cuts.
Republicans tout the revenue trigger as an important safeguard for Missouri's budget. But had the law been in place, a revenue increase in the 2008 fiscal year would have caused a tax cut to occur in 2009 as state revenues plummeted as a result of the recession.
"The trigger is meaningless," said Rep. Jon Carpenter, D-Kansas City. "It is a cut in education."
When the law is fully in effect, a family of four earning $44,000 annually could get a tax cut of about $32, according to Department of Revenue projections. A family of four with a business owner making $100,000 annually could get a tax cut of more than $1,600.
The extra money could allow a small business owner to provide raises or fund employee health plans, said Brad Jones, the Missouri director of the National Federation of Independent Business.
Missouri's tax cut is a less aggressive version of measures recently enacted in Kansas, which also lowered its top tax rate and fully exempted certain categories of businesses from taxes. Last week, Moody's Investors Service downgraded Kansas' credit rating, citing its sluggish economic recovery. It said the income tax cuts were putting pressure on the budget and creating risk for the state's financial future.