In a few days you are going to hear the word “historic” roll off the lips of Republican lawmakers when asked to describe this past legislative session which ends Friday.
Brace yourself for some chest thumping. That’s because for the first time in nearly 90 years, the Missouri General Assembly has passed a state income tax cut. The GOP-controlled Legislature last week voted to override a veto from Democratic Gov. Jay Nixon to seal the deal on the income tax relief package.
Cutting taxes is a religion for many Republicans in Jefferson City and this was the GOP’s marquee bill so expect some euphoria as the paper flies when the final bell on the session sounds Friday.
Before you jump up and down and shout hallelujah, you should know that as far as tax cuts go, this one is fairly benign. Some call it a baby-man tax cut. The legislation includes a gradual reduction of the top income tax rate from 6.0 percent to 5.5 percent and a 25 percent exemption from income taxes for small businesses.
The tax cuts don’t kick in until 2017, and even then the reductions will be phased in — so long as state revenue grows by at least $150 million over its high mark from the previous three years. If state revenues don’t grow, no tax cuts. The soonest the tax cuts could be fully phased in is 2021, meaning their effect would be felt on taxes due in April 2022. At that time, the tax cut could amount to $620 million annually.
The state Department of Revenue projects a married family of four earning $44,000 annually would get a tax cut of $32 once the law is fully in effect, according to a summary provided by the Associated Press.
The real beneficiaries of the tax cut are those involved in business partnerships, limited liability corporations or their own ventures who will receive a deduction of up to 25 percent of business “pass-through” income.
Nixon criticized this provision as a gift to attorneys who are partners in law firms, but it will actually benefit a large number of small businesses and self-employed workers. As most tax cuts go, it will benefit the wealthiest Missourians the most.
But the real question is will the tax cut really stimulate our economy and create jobs as Republicans have touted? That depends, say economists.
Leaving more money in people’s pockets is never a bad thing for growth, but if it comes at the expense of cutting important public services, then it may not be a silver bullet.
It’s OK to cut wasteful government spending but it could actually be harmful to cut revenue needed to provide quality schools, infrastructure and public services that attract businesses.
Economic development experts say that while businesses consider taxes when deciding where to locate, it is typically not the deciding factor. State and local taxes usually come after other criteria such as transportation infrastructure, work force, quality of schools and overall quality of life.
Republicans argued the tax cut was necessary for our state to remain competitive with neighboring states like Kansas which cut taxes last year. Yet Kansas lags behind Missouri in job growth and in number of other key economic growth categories. Last week Moody’s downgraded Kansas’ credit rating citing its budget shortfall, pension liabilities and spending on schools.
That anecdotal evidence didn’t matter to Republican lawmakers and one Democrat who joined them to override Nixon’s veto. They pointed out there are safeguards in the bill to protect the state’s core funding and to prevent a future budget disaster. No worries, we won’t end up like Kansas, they contend.
Nor did it matter that the state has a number of critical issues that require additional revenue sources. Those include things like the aforementioned transportation infrastructure and education.
In the end, the income tax cut vote was about legislative priorities. If the first commandment of Republican politics is “Thou shall not raise taxes,” the second is “Thou shall try to lower taxes.” That was the case this year even if the cut was more symbolic than substantive.
Voting to cut taxes is easy. Who doesn’t appreciate a tax cut? Plus, many of the lawmakers who voted for the bill will be long gone when the tax cut is fully implemented. If things don’t work out, they won’t be around to unwind the problem.
Improving our state’s educational system and transportation infrastructure is a lot harder. It likely will require additional revenue. That means raising taxes. It is easier to push that off for another session.
Time will tell whether the tax cut produced the desired effect of jump-starting our state’s economy or if it actually hindered our state’s ability to create jobs and stimulate growth.
Until then you are going to hear a lot of politicians declaring victory because the taxes in our low-tax state are going to get a little lower in time!