JEFFERSON CITY — Setting up a likely veto showdown, the Republican-led Missouri legislature gave final approval Wednesday to an income tax cut for millions of individuals and thousands of business owners that Democratic Gov. Jay Nixon warned could imperil funding for public schools and services.
The legislation would cut Missouri's top individual income tax rate for the first time in nearly a century and make Missouri the third state — following Kansas and Ohio — to enact a special tax break for people who report business income on their personal tax returns.
Republican legislative leaders have made an income tax cut a priority for the 2014 election year, after failing to rally enough GOP votes to override Nixon's veto of a tax cut last year.
Nixon indicated he would likely veto the tax cut again, describing it as part of an "all-out attack on public education" that would "drastically slash the income of our state."
"On its face, this year's reckless fiscal experiment looks a lot like last year's," Nixon said at a news conference a mere hour after the House passed the bill.
The tax cuts would be phased in over five years, starting in 2017, as long as Missouri's revenues keep growing. More than 2 million families and individuals could get an income tax cut, with as many as 500,000 of those receiving an extra break because of their businesses.
Legislative researchers put the eventual cost to state revenue at $620 million annually, though other estimates range from $569 million to $800 million.
Republicans contend a tax cut would be good for Missouri's economy, particularly as it contends for businesses with neighboring states that have enacted their own recent tax cuts.
"This is broad-based tax reform that would make our state more competitive," said Rep. Andrew Koenig, R-Manchester. "It cuts taxes for every Missourian that pays a tax."
Missouri's legislation is part of a national trend. About a dozen states passed income tax cuts last year, as revenues began rebounding from the Great Recession. Several more states already have cut taxes this year, including Democratic-led New York and Republican-led Wisconsin.
The tax cut battle has been especially intense in Missouri, where millions of dollars were spent last year on TV ads and mass mailings by supporters and opponents of the vetoed bill. House Republicans fell 15 votes shy of the 109 needed to override Nixon's veto last year.
Since then, the GOP House majority has dipped to 108 seats because of a pair of resignations, but it has also grown more unified in support of a tax cut. The House passed the bill 104-48 Wednesday, with Democratic Rep. Jeff Roorda of Barnhart, joining all Republicans who were present in voting for the bill. The Senate passed the bill earlier this month.
If Nixon vetoes the bill, the legislature could attempt to override him before the session ends May 16 or could wait on the results of August special elections for several vacant seats in hopes of re-establishing a two-thirds GOP majority for a veto override attempt in September.
Democratic lawmakers asserted Wednesday that a tax cut would make it harder for Missouri to adequately fund its public schools, which are getting about $600 million less this year than they are supposed to under state law.
"This bill harms the very things that are going to attract businesses to this state, and that is education and transportation," said Rep. Margo McNeil, D-Florissant.
The legislation would gradually cut Missouri's top individual income tax rate from 6 percent to 5.5 percent and phase in a new 25 percent deduction for business income reported on personal tax returns. The incremental tax cuts would occur only if state revenues rise by at least $150 million. The bill also would increase a tax deduction for low-income residents and adjust Missouri's tax brackets based on inflation.
The bill Nixon vetoed last year included a similar reduction in the top individual income tax rate but a larger tax break for businesses and lower-income individuals and a smaller revenue-growth trigger. It was considerably more complex, because it also included provisions that would cut income taxes further if Congress passed a law allowing states to more easily collect sales tax on online purchases. A drafting error also would have imposed a state sales tax on prescription drugs.
"Last year was too big of a bite with some of the bad things in it," said Rep. Mike Thomson, R-Maryville, who sided with Nixon's veto last year. "But at this point and time, I'm OK with this bill."
Cost estimates for tax cut vary.
The Institute on Taxation and Economic Policy, a Washington-based research group, estimates the measure could reduce Missouri taxes by $569 million. It says people earning between $33,000 and $52,000 annually could get an average tax cut of $57, while the top 1 percent of Missourians — earning more than $391,000 annually — could get an average tax cut of $7,792.
The Missouri Budget Project, a St. Louis-based nonprofit that analyzes fiscal issues with an emphasis on how they affect the poor, estimates the tax cut could eventually total $800 million annually. It said the reduction in the individual income tax rate could affect about 2.7 million taxpayers and the business-income deduction could be claimed by more than 500,000 taxpayers.