Missouri tax bills unlikely to trigger penalties in federal stimulus law

When Congress passed the COVID-19 relief bill providing almost $3 billion to Missouri for state operations, it also included a command that the money couldn’t be used to offset tax cuts.

Both chambers of the Missouri General Assembly have passed bills that include tax cuts, and one version or another seems a good bet for passage by the time the current session ends in May. But each chamber also included provisions that will increase revenue, and the sponsors said Wednesday they don’t expect their bills to trigger the federal stimulus law’s penalty provisions.

The Missouri House, on the last day before the mid-session break last week, passed state Rep. J. Eggleston’s bill to cut the top income tax rate on Jan. 1 and start collecting sales taxes from online retailers on the same day. While the tax rate cut will take an estimated $44 million out of state general revenue in the coming fiscal year, the sales tax expansion will add between $37 million and $58 million while also raising $15 million to $23 million for schools, conservation and state parks.

The reason a bill with even a modest revenue increase seems likely to pass in the tax-averse General Assembly is pressure from businesses to enact a law implementing the 2018 Wayfair decision by the U.S. Supreme Court. The ruling expanded the authority of states to collect sales tax from online retailers.

“We are looking at reducing income tax in our state because we are getting Wayfair money,” said Eggleston, R-Maysville. “Our bill was filed well before the recovery act.”

Over the first three fiscal years, Eggleston’s bill would net an estimated $22 million to $168 million for state operations.

Also on the last day before the break, the Senate passed Sen. Andrew Koenig’s bill with income tax cuts and sales tax expansion. The fiscal note for Koenig’s bill estimates it would add $147 million to $255 million to state coffers over the first three fiscal years after passage. 

One provision, which changes the due date for monthly sales tax reports, is estimated to reduce state general revenue by $42 million to $48 million by June 30, 2022. But Koenig said he doesn’t see how that would trigger the federal law, since it just changes when the taxes are due.

“We’re still going to collect the same amount of money,” said Koenig, R-Manchester.

The American Rescue Plan, signed into law by President Joe Biden last week, prohibits states from using their allocations “to either directly or indirectly offset a reduction in the net tax revenue.” The penalty is either the amount of the tax cut or the entire state allocation, whichever is less.

Attorney General Eric Schmitt joined 21 other Republican attorneys general in a letter to Treasury Secretary Janet Yellen objecting to the dictate on constitutional grounds. And in interviews, both Eggleston and Koenig said they resent federal interference in state affairs.

“The feds for years have seemed to challenge or push the envelope on the 10th Amendment,” Eggleston said. “This seems to be another example of that. Time and the courts will have to decide what is allowable and what is not.”

A key difference between the two bills is when online tax collections, and therefore the new tax cuts, would begin. Eggleston’s bill sets the date as Jan. 1, 2022 and Koenig’s bill pushes that off a year, to Jan. 1, 2023.

The annual revenue from the sales tax expansion would be $105 million or more. There would also be about $60 million for cities and counties that have voter-approved use taxes.

The tax cuts in Eggleston’s bill would reduce the top income tax rate by 0.1 percentage points and schedule another 0.1 percentage point cut for the future.

Koenig’s bill cuts income taxes for lower-income families by establishing a new Missouri Working Family Tax Credit, equal to 10 percent of the federal Earned Income Tax Credit. The credit would be implemented at the same time as the online tax collections.

The tax cuts will grease the way for the Wayfair legislation, Koenig said, which is a priority for businesses.

“We literally have the worst possible thing in the tax code – telling people they get a tax break if they buy from non-Missouri businesses,” he said.

His bill also includes 0.1 percentage point cuts in the top income tax rate, three in all.

Under a tax cut bill passed in 2014, the top income tax rate is reduced by 0.1 percentage points when state general revenues are $150 million more than the highest revenue amount received in any of the past three years. Revenue growth is measured at the end of the fiscal year on June 30 and, if triggered, the tax cut takes effect on Jan. 1 of the following year.

The rate for 2021 is 5.4 percent and forecast to fall to 5.3 percent Jan. 1, 2022. But because fiscal 2021 revenue is artificially high due to a change in tax filing dates, it is unlikely that there will be another automatic cut until 2025.

Under current law, tax rates would stabilize at 5.1 percent for the top bracket. Over time, passage of Koenig’s bill would drive the top tax rate down to 4.8 percent. The Missouri Working Family Tax Credit would also increase to 20 percent of the federal Earned Income Credit the next time the top rate is cut.

Under Eggleston’s version, the tax rate for 2022 would be 5.2 percent, and the top tax rate would settle at 4.9 percent.

Without the rate cuts, Eggleston said he would not be willing to enact the new online taxes.

“You can get in the ballpark, and you can’t get it down to zero,” he said of the offsets. “It is because without that, then you are looking at, when you factor in local as well, state and local tax increases of pushing $200 million. I am not going to put my name on that.”

The working family tax credit helped pass Koenig’s bill in the Senate on a 28-4 vote with nine Democrats supporting it. In the House, no Democrats supported Eggleston’s bill while 14 Republicans opposed it on a 96-59 vote.

One change Koenig is willing to make is to push his bill’s effective date out for another year if necessary because of the COVID-19 relief bill penalties.

“If we have to make a change in the house to delay it one year, it would be outside the time frame of what the act was saying,” Koenig said. “I find it hard to believe that the federal government can shut down all tax policy in all 50 states at one time.”

This story was republished with permission from the Missouri Independent, a nonpartisan, nonprofit news organization covering state government, politics and policy.


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