ANALYSIS: Tax change could affect Missouri budget

Sunday, May 1, 2011 | 3:36 p.m. CDT; updated 4:59 p.m. CDT, Sunday, May 1, 2011

JEFFERSON CITY — As Missouri's legislative session enters its final weeks and lawmakers work out the details of the state's $23 billion budget for next year, at least one factor in the state's finances is being left out.

A change in the federal tax code now means Missouri could miss out on as much as $190 million in revenue over the current budget year and the next one that starts July 1. The federal tax changes affect Missouri's budget because the state's tax laws are linked, or "coupled," to federal tax rules for business purchases.

Congress in December extended the federal income tax rates of the last decade and changed part of the federal tax law that governs businesses' new capital investments in equipment and machinery. Since 2008, businesses could deduct 50 percent of the cost of those investments in the year that they made the purchase. The remaining value of the purchase could be deducted over the next several years.

After the end of 2010, businesses were to no longer be allowed to deduct half the cost of those investments in a single year. However, Congress renewed permission to do that and increased how much businesses could deduct for the purchases they make this year.

Nick Johnson, a researcher for the Washington, D.C.-based Center for Budget and Policy Priorities, estimated that Missouri could lose $190 million because of the federal tax change. Johnson said 17 other states also stand to lose revenue.

Johnson said Congress made the changes because it wanted to help the economy by encouraging businesses to buy new equipment and then use the savings to produce more. He said that might happen, but he doesn't think the increased economic activity will generate enough tax revenue to offset what states will lose.

"Any of that growth pales in comparison to the direct impact of the legislation," he said.

Because Missouri's tax laws are coupled to the federal tax statutes, businesses will be able to claim similar deductions on tax returns they file with the state, which means Missouri could collect less tax revenue than it otherwise would have.

And that could affect the state budget lawmakers are working on.

House members and senators were to begin negotiations Monday to finalize the more than $23 billion state operating budget for the 2012 fiscal year that starts July 1. Lawmakers must approve a state spending plan by the end of this week.

Linda Luebbering, budget director for Gov. Jay Nixon, has said budget planners did not include the potential for lost revenue from the federal tax change in their estimate of tax collections for the next budget year. She said the state cannot know how much businesses will spend in new equipment, which makes it difficult to say how much revenue the state would be missing out on.

"We did not show a specific reduction in revenue because of that provision, because of other offsetting provisions," she said. "It really depends on how businesses react to it."

Republican Rep. Andrew Koenig, chairman of the House Ways and Means Committee and owner of a paint company, said the deductions might spur businesses to purchase more needed equipment this year, as Congress is hoping it will, rather than waiting until future years when they would be able to deduct less.

Luebbering said the revenue estimate lawmakers use to plan the budget is adjusted based on many factors, including the performance of the state's economy.

Although no proposals to de-couple Missouri's business taxes have come before lawmakers this year, some advocates say legislators now should consider it.

Tom Kruckemeyer, an economist with the Missouri Budget Project, said the state was in a similar position in the early 2000s when the federal government used a similar tax tactic to help a sputtering economy during an economic downturn. The Missouri Budget Project is a nonprofit group that analyzes how fiscal policies affect low- and middle-income families.

In the early 2000s, Missouri suspended businesses' ability to take advantage of the federal accelerated depreciation provisions on state taxes for one year only, then reverted back to following the federal law. Kruckemeyer said making a more permanent change could help head off future lost tax collections.

"The current business climate is pretty favorable," he said. "It's our belief that the state isn't in a position to be forgoing future revenue."

Wes Duplantier covers state government and politics for The Associated Press.

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