Nixon cites cost estimates, sales tax hikes as among reasons for tax-cut veto

Wednesday, June 5, 2013 | 7:20 p.m. CDT; updated 12:55 p.m. CDT, Tuesday, August 27, 2013

JEFFERSON CITY — Missouri Gov. Jay Nixon raised a variety of objections Wednesday in vetoing legislation that would have cut Missouri's income taxes. Here is an overview of the concerns cited in his six-page veto message:

Low taxes

In general, Nixon said Missouri already has some of the lowest and most stable taxes in the nation. He said the income-tax-cut legislation contains "risky experiments."

Cost estimates

Nixon contends the bill's cost estimate prepared by legislative researchers — of between $492 million and $692 million annually, when fully phased in — is understated. He cites an annual cost of more than $800 million. And he said the cost could reach $1.2 billion in a single year. To hit that high mark, several things would have to occur: Congress would have to pass a measure related to online sales taxes, which would trigger an automatic one-half-percentage-point reduction in Missouri's income tax, and people would then have to seek retroactive tax refunds.

State services

Nixon asserts the tax cuts would "leave a gaping budget hole for decades to come," jeopardizing funding for education, public safety and social services.

Sales tax hikes

The governor said an apparent bill-drafting error could repeal a sales tax exemption for prescription drugs, costing consumers an estimated $200 million annually. He also objected to a provision repealing a sales tax exemption for college textbooks.

Financial safeguards

The bill would make a phased-in reduction of corporate and individual income taxes contingent upon state revenues growing by more than $100 million more than their high point from the previous three years. But Nixon objected because the same trigger would not apply to other tax cuts, including a phased-in 50 percent deduction for business income reported on individual income tax returns.

Nixon said the financial safeguard is faulty because it is based on the growth of tax collections, not the net amount the state receives after tax refunds. And the governor said the tax-cut trigger would have failed to prevent tax cuts during a recession-induced budget shortfall in 2009, had the legislation been in place then.

Business income

The governor contends that the tax deduction for business income reported on individual tax returns is not adequately defined and would provide an incentive to avoid taxes by creating shell businesses or restructuring existing businesses.

Current incentives

Nixon said that a general reduction in the income tax rates could undercut previously approved tax breaks for specific businesses. Missouri currently lets some businesses keep a portion of their employees' withholding taxes as an incentive for expansion projects. If the individual income tax rate is cut, Nixon said those businesses would receive a smaller incentive — potentially jeopardizing their loan payments on projects that already are underway.

Unfair taxes

The governor said the legislation would make Missouri's tax code less fair by providing two people with identical incomes different sized tax cuts, depending on whether those people own a business structured in a certain way or merely work for a business.

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