Now that the Missouri legislature mercifully has adjourned for the year, Gov. Jay Nixon should waste no time in vetoing House Bill 253, the final iteration of the unfair, unwise and unproductive session-long effort to cut state income tax rates.
In some ways, HB 253 is less odious than earlier versions of the tax-cut proposal. It would not, for example, replace revenue lost to the income-tax cut with revenue raised by higher sales taxes. That means poor and working-class Missourians wouldn't be dinged — again — to pay for tax breaks given to wealthier Missourians and corporations.
On the other hand, after 10 years, the annual price tag for the bill would be anywhere from $700 million to $817 million. That's money that would not be spent on schools, higher education, corrections or any of the other niceties that smart states invest in.
The bill's supporters insist that annual safeguards — or "triggers" — included in the legislation would keep the cuts from kicking in unless state revenue has risen $100 million. State revenues will grow, they say, just not as fast as they would if HB 253 hadn't been passed.
This growth is predicated on a boom in business activity that supporters expect once people figure out how tax-friendly Missouri has become. There is little objective data to support that conclusion and quite a bit to suggest that tax rates are not a critical factor in business location or expansion decisions.
HB 253 would reduce the top personal income tax rate from 6 percent to 5.5 percent. Everyone in Missouri who earns at least $9,000 a year pays the 6 percent top rate. The graduated income tax was adopted in 1931; at the time, very few people earned $9,000 a year — equal to $137,682 today. Missouri essentially has a flat tax rate, one big reason for its poor state services and benighted economic condition.
The basic corporate income tax rate for so-called "C-corporations" — generally public companies — would be cut from 6.25 percent to 3.25 percent. The cuts would be phased in over 10 years as long as revenue growth "triggers" were pulled.
The big winners under HB 253 would be so-called "pass-through" corporations organized under subchapter S of the Internal Revenue Service code or as partnerships, limited-liability firms (in some instances) or sole proprietorships. These firms "pass through" their corporate income to individual owners or owners, where it is taxed as individual income.
IRS data show that some 82 percent of all U.S. companies are organized as pass-throughs. This enables them to avoid federal corporate income tax. If HB 253 becomes law, they'll see their Missouri income taxes cut by 50 percent.
Result: The owners of a pass-through corporation eventually would be paying a Missouri income tax rate of 3.25 percent on their income; in some cases, the rate would be as low as 3.125 percent. The people who clean the office toilets will be paying 5.5 percent.
Even as the legislature is bending over backward to give a break to pass-through companies, Congress has begun to realize that such firms have an unfair advantage over C-corporations that have to pay the 35 percent federal rate. With tax shelters, credits and other forms of legal tax evasion, few companies actually pay as much as the 35 percent rate, but it's the thought that counts.
Pass-through owners argue that taxing their corporate income, and then turning around and taxing their personal income, amounts to double taxation. It does. That's fair.
Corporations create multiple public costs that the individual taxes of their owners don't begin to pay for. Like the rest of us, they're protected by the most expensive military on earth. Their employees are educated in public schools. Their goods are shipped on public highways. Laws are enforced for them. Nearly all of the state and federal civil court systems exist to litigate their disputes. It goes on.
It simply makes no sense that they get a free (or cheaper) ride on income taxes. In Citizens United v. FEC, the Supreme Court ruled that corporations are people when it comes to funding elections. They ought to be people when it comes to paying taxes, too.
HB 253 is a pure corporate welfare bill. Veto it, governor.
Copyright St. Louis Post-Dispatch. Reprinted with permission.