Report from Rep. Warren Love

Posted September 12, 2013 at 1:18 pm

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My Fellow Missourians,

The summer of 2013 has flown by. My in-district activities have included constituent work and attending fairs, community fundraisers and chamber meetings. Most recently I’ve been posting the Missouri flag by riding my horse in community parades. I’ve also visited with county commissioners, school boards and superintendents.

As many of you know, the legislature will convene for a constitutionally required veto session on Sept. 11. In order for a veto to be overridden the bill must return to the chamber of origin (bills that originated in the House must first be brought up for an override in the House, and Senate bills in the Senate), and must pass that chamber with an affirmative vote of 2/3 of the members in the body, and then must go through the same process in the other chamber. In the House, 109 votes are required, and in the Senate, 23 votes are required. It just so happens that we have a Democrat Governor, 109 Republican House members, and 24 Republican Senate members. This is the first time in the history of this state that we have had a scenario such as this.

Many of you are aware that Governor Nixon vetoed 29 Bills, plus three items in three budget bills that were passed in the 2013 legislative session. One of the most discussed bills is HB 253 which: “Changes the laws regarding the streamlined sales and use tax agreement, tax amnesty, the community development district tax, income tax, sales and use taxes, use tax nexus, and the transportation development tax.” This bill passed the House 103 to 51 and the Senate 24 to 9.

HB 253 which Nixon vetoed, covers several areas of business and personal income tax as well as sales and use taxes. It also calls for the state to support a measure designed to increase collection of sales tax by web and catalog retailers. The multi-state Streamlined Sales and Use Tax Agreement, under which 24 states have agreed to modify sales tax laws, in makes it easier for retailers to collect taxes across the states.

Nixon has not objected to supporting the Streamlined Sales Tax Agreement. In fact, he has already included anticipated revenue from it in his fiscal year 2014 state budget proposal, his spokesman says, without specifying the revenue amount. In the governor’s veto message for HB 253, Nixon doesn’t mention the Streamlined Sales and Use Tax Agreement, also known as the SST. Nor does he mention a provision in the bill calling for the state to require Internet retailers to collect tax if they get business from Missouri-based affiliate web sites-a provision known as a nexus use tax, but commonly known in other states as the “Amazon tax,” so-named because its biggest effect would be on Amazon.com, the world’s largest retailer by web sales.

Governor Nixon also strongly objected to a provision in the bill that calls for a 0.5% cut in the state’s maximum income tax rates coinciding with enactment of the Federal Marketplace Fairness Act. He contends that the 0.5% cut would amount to a loss in state revenue of $300 million per year. The Marketplace Fairness Act, which was passed by the U.S. Senate in March with a vote of 69-27. If passed by the U.S. House and signed into law, the act would restore states’ sovereign rights to mandate sales tax collections by internet and catalog retailers. Under current federal laws, states can mandate sales tax collections only on retailers with a physical in-state presence like brick and mortar stores or distribution centers.

Governor Nixon adds that the Marketplace Fairness Act provision would allow taxpayers to apply for the 0.5% tax reduction for three prior years, resulting in as much as an additional $900 million in lost tax revenue. Although Nixon notes that the Marketplace Fairness Act would also be expected to generate new revenue from sales tax collection, he contends that any additional revenue would not come until a year or so after the federal law was enacted, leaving the state to realize immediate cuts in tax revenue that would hit education and other “vital public services.”

A study from the University of Missouri found that Missouri could lose $1.78 billion in sales tax revenue between 2010 and 2014 if it doesn’t require more online and catalog retailers to begin collecting sales tax. The study also recommended that the state join the Streamlined Sales and Use Tax Agreement, which enable states to begin receiving revenue from the more than 1,400 retailers that have voluntarily begun collecting sales tax in SST member states even without a new federal law. Without enacting HB 253, the governor’s office did not say how or when it expects the state to join the SST and generate additional revenue for the 2014 fiscal year budget.

In my opinion, it is just a matter of time that the United States Congress will approve and allow the individual states that have adopted the Stream Line Sales Tax Agreement to collect this revenue. Many people see this as a tax increase, however it is really a collection issue. But reality is that it will not happen this year and in all probability not in 2014, because 2014 is an election year. However Missouri needs to be prepared to collect this when it does go into effect. That’s what this Tax Reform Bill is really all about. The opposition is touting that the state could potentially lose $1.2 billion in tax revenue due to this bill, yet for this to happen, all five of the following bullet points would have to happen first.

•The Marketplace Fairness Act would have to pass Congress and be signed into law by the President. We all know how Congress is functioning at this point in time. This will not happen until at least 2015.

•Our Department of Revenue would have to issue an Emergency Rule changing the rate and tax tables AND allow taxpayers to seek refunds for the previous three years. They would also have to file a concurrent Proposed Rule that would be subject to review by the Joint Committee on Administrative Rules, which has the power to review rules that are not consistent with our Constitution or statutes. This maneuver to apply a retroactive income tax rate to amended returns would be a violation of Article 1 Section 13 of the Missouri Constitution, which specifically states that no ex post facto law can be enacted. The Governor’s office disagrees, however keep in mind he is the opposition to this bill; and,

•All 2.8 million Missouri taxpayers must file amended returns for the previous three years; and

•The Department of Revenue would need to process all 11.2 million returns that first year when they typically process 2.8 million a year; and

•The $1.2 billion loss is assuming Missouri would not collect any additional revenue from the sales and use taxes on sales made to Missouri AND that the money each Missourian would be getting in their tax cut would be stuck in a drawer and not spent (circulated back into our economy).

The facts are clear – Missouri is shrinking. A glaring reminder is that we lost a congressional seat in the 2010 census. Another fact – Missouri ranks 48th in economic growth over the past decade. We need to stop the scare tactics with education and government services…..our focus should be on growing Missouri.

This is what HB 253 actually does:

1. Reduces the individual tax rate in our state, for people making over $9,000, from 6% to 5.5%, by reducing the rate by .05% per year for 10 years.

2. Creates a new exemption of $1,000 for individuals making less than $20,000 per year, or for couples filing jointly making less than $40,000 per year. Essentially, this is a standard deduction, so if one makes $19,000 per year, this exemption would reduce the amount on which one is taxed to $18,000, saving the citizen $60 in state income taxes.

3. Creates a 50% business income exemption, phased in at 10% per year, over 5 years, for businesses that are not incorporated, and are therefore taxed at the individual income tax rate as opposed to the corporate tax rate. This would include Sole Proprietors, LLC’s and S Corps, which are the most common forms of organization for small businesses. To give an example of what the 50% exemption at 10% per means, assume a business pays taxes on $100,000 per year. After year one, the business will receive a 10% exemption, meaning they will only be taxed on 90% of their income; therefore the taxable income for this imaginary business in year one would be $90,000. In year two, they would be eligible for a 20% exemption, meaning they will be taxed on $80,000, and so on, until year five, at which point they would be eligible for a 50% exemption, and would therefore be taxed on $50,000. At this point, the phase in is complete, and the business will be taxed on $50,000 perpetually, assuming their gross taxable income on their state return remains at $100,000. In this scenario, the company would have originally been paying $315 on the first $9,000 of income, and 6% on the remaining $91,000, which is $5,775. Once the cut is fully phased in, this business would pay $315 on the first $9,000 of income, and 5.5% on the remaining $41,000 of income, which is $2,570. So this imaginary business would save $3,205 on their state tax bill.

4. Reduces the corporate tax rate from 6.25% to 3.25%, by reducing the rate by .3% per year for 10 years.

5. Reduces the personal income tax rate by an additional .5% in the event that Congress passes, and the President signs the Federal Marketplace Fairness Act (FMFA), or similar legislation, allowing states to collect sales taxes on internet sales that occur between buyers within the state, and sellers outside the state.

The absolute fastest that HB 253 can be fully phased in is 10 years. The only way it that can be achieved is if the state realizes an increase in revenue of at least $100 million, in 10 CONSECUTIVE years. When considering state revenues today, versus state revenues once the bill is fully phased in, an overall INCREASE in revenue of $200 million is the absolute minimum outcome that could be had. Also, understand that if revenue increases by $100 million next year, and then the year after that it decreases by $200 million, then phase two of the rate cuts would not go into effect. For phase two to go into effect in year three, revenue would have to increase, not just by the $200 million that was lost, but an additional $100 million, for a total of $300 million, in order to eclipse the high water mark for collections over the previous three years. After studying Missouri’s tax collections over the last 20 years, it is more likely HB 253 will take fifteen years or more to be fully implemented.

In summary, this is truly a Compromise Bill based on a roll back only when $100 million of new revenue comes in each year over a 10-year period. Other states have proven that a reduced tax burden is the key to a vibrant economy and in making the state a place where businesses want to start and/or move. I urge you to do your homework. Research the states that have proven tax cuts that grow the economy, such as Indiana, Texas, Oklahoma, and Tennessee. I voted in support of all 29 Bills that the Governor vetoed in Regular Session. I plan to uphold those votes in Veto Session next week for the Greater Good of Missourians.

If you would like to be added to the e-mail list to receive our Capitol Reports, you can e-mail me at warren.love@house.mo.gov or call the Capitol office at 573-751-4065.

“Looking Onward”

Warren D. Love, State Representative

Representing the good people of the 125th District