As many of you know, and as some of you may not, the legislature will convene for a constitutionally required veto session on September 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 the state that we have had a scenario such as this.
The Governor has vetoed 29 bills. Of these, 10 originated in the House, and 19 originated in the Senate. The Senate works a bit differently than the House, in that the Senate rules allow a single member to filibuster a bill. If enough Senators have the desire to prevent a bill from passing, then it is possible several of the Senate bills will not be sent over to the House, even if there are enough Senators who would vote to override, in order for the override to be successful.
The most prominent pieces of legislation the Governor vetoed are HB 436, which has been dubbed the 2nd Amendment Preservation Act, and HB 253, which is the legislature's income tax cut bill.
HB 436 was vetoed, primarily, because the Governor feels that it violates the Supremacy Clause in the United States Constitution, due to the provisions in the bill that nullify federal gun control laws. The Supremacy Clause in the Constitution states "This Constitution, and the laws made in pursuance thereof" shall be the supreme law of the land. I have written with regard to my feelings about the Supremacy Clause before, so I will be brief while writing about it this time. The clause clearly states that the laws that are made in pursuance to the Constitutionally granted authority of Congress will be the supreme law of the land. It does not say "This Constitution, and every subsequent act of the Congress, the President, or the Courts, shall be the supreme law of the land," and it doesn't say that for a reason. If the Constitution were created as a recommendation to the federal government, and not as a tool to be used by the people and the states to limit the power of the federal government, then what would be the point in even having a Constitution? How effective is a document whose sole purpose of existence is to ensure the protection of certain rights and liberties for the citizens of the country it is designed to govern, when the entity which it seeks to control is the same entity that determines what the extent of those protections are? I would contend that the answer is "not very effective."
All of that being said, I will vote to override HB 436, and I am fairly certain this bill will be sent from the House to the Senate. I do not know if the Senate will override.
HB 253 is another pivotal bill, which would make several changes to our state's income tax code. Unfortunately, the Governor has made this particular bill the center of his attention, and has traveled the state delivering speeches full of inaccuracies and half truths about the bill. In addition to his personal efforts to defeat any possibility of a veto override, he has threatened to withhold funds from the state's schools and disability programs, which has led to an all-out blitz by the Missouri Association of School Administrators (MASA), which, in turn, enlisted nearly every superintendent in the state, which, in turn, enlisted nearly every teacher in the state to oppose this bill. It was a politically brilliant move on the part of the Governor, assuming he can get to sleep each night, after intentionally misleading Missourians about the provisions of the bill, and after leveraging the education of children as a political tool.
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 $5775. 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. It is projected by researchers that the rate reduction of .5% would cut approximately the same amount of revenue that the increased sales tax collections from internet sales would produce.
There were a couple of drafting errors in the bill. When bills are drafted, we are proposing to either change existing statute, or just add or remove existing language in a statute. Because of this, often times, words are inserted in the middle of sentences which are already existing law, which requires these words to be called out in some way so members can understand what is happening to the statute as a result of the bill. In order to accomplish this, words that are [being deleted, have brackets around them, like this], and words that are being added, are underlined, like this. Sometimes, when a bill is 100 pages +, it is easy to make a mistake on the placement of a bracket. This is what happened in this bill to cause a drafting error. Inadvertently, the existing sales tax exemption for prescription drugs was repealed, effective January 1, 2015. This happened because a bracket was accidentally placed on the left side of the wrong word. This was part of a very large section of the bill that related to the passage of the FMFA, which was referenced earlier. This language was referred to as the streamlined sales tax language, which basically brought parity to local and statewide sales tax exemptions. By this I mean that some items are exempt from state sales tax, but not local sales tax, and vice versa. The goal of this language was to simplify the sales tax code, so that the online retailers who will be required to collect and pay sales taxes in all 50 states (in the event the FMFA passes) are able to more easily handle the implementation of this massive change to their business model. Obviously, asking a small online retailer to maintain enough staff to comply with the tax laws of literally thousands of different taxing districts in each state is difficult, but when the exemptions differ between state and local taxes, it becomes much more difficult. As I said, the repeal of the exemption would not go into effect until 2015, and given that reinstating the exemption is a non-controversial matter, and the fact that the leaders in both chambers have committed to ensuring that the reinstatement would be a priority, I am comfortable with overriding the veto, and passing a bill to reinstate the exemption, next year. The exemption on text books was also repealed as a part of this language. This is a less problematic issue, and I think that would likely be reinstated also, but even if it were not, I think this is still a good bill, and the tax cut package would likely compensate for any increased sales tax costs that folks would experience on text books.
The opposition to the bill has been largely tied to misleading and, in some cases, blatantly false information. Some of the claims the opposition has made are bulleted and in italics, my comments in standard font:
· If low taxes created jobs, then MO would have enormous job growth, because MO has 7th lowest state taxes as a percentage of personal income in the country.
MO has a low tax burden when considering all sources of revenue. All sources of Revenue can include fuel taxes, driver license renewal fees, and our cigarette taxes, among other things, which are all very low compared to most other states. It is a different story when considering only our income tax rates, as we tax income at 6% for everyone making over $9,000. There is not a state that borders Missouri with an income tax rate that high, on incomes that low, and the income tax rates in a state can either be a driver or killer of job growth. Missouri has been 48th-50th in various measurements of economic growth for several years running. I would contend that our unfriendly income tax structure is complicit in those statistics.
· The experiment in Kansas has been a complete failure. Kansas state revenues grew in 2013 by just 2.7% while Missouri's grew by nearly 10%.
First, I suppose we need to define the word "failure". If this statement is intended to throw stones at Kansas' income tax cut, which by the way is completely different than Missouri's, then I guess I just don't see how revenue growth of 2.7% is a "failure". Just to give you a glimpse into the difference between the two tax cuts, Kansas reduced their top income tax rate from 6.45% to 4.9%, and eliminated the tax on non-wage income, entirely. This is over triple the size of the rate cut we have passed in Missouri, and it happened all in one year, as opposed to over 10 years, like Missouri's. Comparing the impacts of the two bills is a misleading tactic, and one that has no credibility.
· Because legislators cannot get their fiscal house in order, the burden is passed to local taxpayers. The state has failed to live up to its end of the bargain made with the current foundation formula, and is currently underfunding schools by a total of $620 million.
When I sat in the House chamber and listened to the Governor deliver the first state of the state address of my time in the legislature, I was particularly interested in the budget related portions of the speech, as I had taken a keen interest in the states budgeting process and other fiscal issues. The Governor made many promises to people across the state with regard to increased funding. As a freshman Representative, I sat there wondering from where all this extra money was coming. Turns out the Governor was relying on revenues that would be generated from various policy bills, which had never gained traction in the legislature in previous years. He blew the consensus revenue estimate out of the water, and basically built a budget based on revenues he knew were very unlikely to be generated. Beyond that, one of the policy bills on which he was counting was the repeal of the property tax credit for renters, otherwise known as the "circuit breaker". He gave the acceptable language to the Senate, and the bill made its way through the legislature and to his desk in the exact same format in which it was originated. What did the Governor do with the bill? He vetoed it! So one of the policy bills, on which his budget had relied, made it to his desk, and he simply changed his mind. The legislature had to reduce the budget that the Governor gave us, in order to make it even have the remote appearance of being balanced. So if anyone's fiscal house needs to be gotten in order, it is the Governor's, not the legislature's.
I have constantly heard from some folks in the education community that the legislature has cut the foundation formula, and that they feel that the legislature should be precluded from passing any changes to our state's tax structure until we either fully fund the formula, or rewrite the formula. It is extremely important to note that, since the inception of the formula, it has never been cut. In fact, the formula was fully funded up until FY 2009, at which point the state's General Revenue collections dropped devastatingly. When the state's revenue was depleted, the legislature did not cut the formula, however, the formula called for an increase in funding, as it has in subsequent years, after 2009. The state's revenues were declining, at a much more rapid rate than would be seen, even in the worst case scenario, as a result of HB 253, yet the formula call was increasing. Even when general revenue was down $1.3 billion in FY 2010, from its high mark in FY 2008, the legislature did not appropriate any less to the formula than it did in previous fiscal years. This year, the legislature increased funding to the formula by the Governor's recommended amount of $66 million dollars; so portraying the legislature as an enemy of public education is not an accurate portrayal.
· HB 253 would cost more than $800 million once fully phased in.
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. The fiscal note that calculates a cost of $800 million is exclusive of the mandatory increases in revenue collections for subsequent phases of the rate increases to occur. When the fiscal note was drafted, the oversight staff who worked on it could not assume that the $100 million increase in revenue is occurring as a result of the bill. They have to assume that those revenue increases are occurrences which are independent of the impacts of the bill, therefore this minimum $1 billion revenue increase cannot be calculated into the fiscal note to offset the $800 million dollar cost. 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.
· HB 253 would impact the state budget beginning this year. If Congress passes the Federal Marketplace Fairness Act, then tax payers would be eligible to retroactively apply the new tax cut for up to three years, which would cost the state $1.2 billion.
I described the FMFA earlier, and the .5% tax rate cut that would ensue in the event that the bill were passed by Congress, and signed by the President. This one provision of the bill is the pinnacle of the Governor's argument that the state will be financially devastated by HB 253, and is the basis for his withholds. For the Governor's doomsday projections to come true several things would have to happen.
The Republican led U.S. House of Representatives would have to pass a bill, which is widely seen and understood as a tax increase on every single American, in the exact form in which it was sent over by the Democratic led U.S. Senate. This would have to happen in the midst of: a nationally reported and very public debate on the impending debt ceiling debacle, the lack of Congress having passed a budget, the lack of any of the spending bills to fund the federal government having been passed, and sent to the White House, and the implementation of the Affordable Care Act (Obamacare) beginning October 1st. This is simply not going to happen.
The Governor would be required to improperly interpret the intent of the language in HB 253, which in my opinion was intended to allow people whose tax years begin on various dates throughout the fiscal year to take advantage of the tax rate reduction, to mean that the legislature intended for every citizen to be able to retroactively apply the new tax rate to every tax year since the beginning of time, which is only limited by a separate provision of existing law which limits the number of years that someone may amend their previous year's tax returns to three. This should not happen, but would be up to the Governor.
The Governor would be required to instruct the Department of Revenue to implement the law consistent with his interpretation, which would be in violation of Article I Section 13 of the Missouri Constitution, which prohibits laws from being enacted or applied in a manner which would impair the operation of a contract or which is retrospective in its operation. This shouldn't happen, but would be up to the Governor.
Every single Missourian who filed and paid income taxes in the past three years would be required to re-file their previous three years of tax returns in order to claim their refund for those years. Definitely not going to happen, since a lot of folks won't even be aware that they are able to do that, some people have probably moved out of state, and the people who have moved in state wouldn't have three years of returns to amend.
If all of these things happened, half of which rely on the Governor to do them, then his prediction would come true.
The three year allowance for amending returns is not in place to allow people to take advantage of new tax rates. It is in place to allow people to correct errors in their tax returns, in the event they discover an error in their reporting that would change their tax liability. I have heard one claim that in 2007, a bill was passed which retroactively changed tax code. This is not really true, as the bill only changed the tax code for tax years beginning in the year in which the bill became law, not years prior to that. By limiting it to the year the bill became law, it was not technically retrospective, as people and businesses are not required to file their tax returns until at least 1 year, 3 months and 15 days from the beginning of the tax year, which would be after the date the law took effect.
Also note that nothing in this bill, except this section, changes the tax code for any years beginning earlier than January 1, 2014. So the majority of any impact experienced as a result of this bill would not begin being realized until FY 2015, thus the Governor's threats to withhold money this year, are entirely unnecessary.
· HB 253 puts the state's 40 year standing AAA bond rating in jeopardy, and would lead to increased interest rate costs for all school districts. This past year, the state of Kansas had its bond rating reduced by two whole levels over fears that the state could not pay its bills long term. This fear has since been confirmed as Kansas has raised taxes by over $700 million...
Unless someone else knows where I can find it, there is nothing in any report from any of the three credit rating agencies that says that if HB 253 becomes law, our credit rating will be downgraded. The concerns that were relayed by these agencies were related to the Governor's claims that the state would have to issue all of the previously described three years' worth of refunds. As I illustrated, this will not happen, absent Congress, the President, the Governor, and every taxpayer in Missouri being on the same page. The real threat to Missouri's credit rating, which has been highlighted in previous reports from ratings agencies, is our state's abnormally large dependence on a federal footprint, which the Governor wants to increase by way of Medicaid expansion.
· The "protections" in HB 253 are meaningless, and do not apply to all tax cuts in the bill. From 2007-2009, the height of the economic recession, revenues grew by $100 million, and under HB 253, taxes still would have been cut. Second, the 50% deduction on business income on businesses that are set up in the same manner as law firms, accounting firms, or lobbying firms goes into effect immediately.
In fiscal year 2009, revenues went down, so there would not have been a phase of the tax cut that was enacted that year. Fiscal years begin on July 1 of the previous calendar year, so in September of 2008, which was when the recession hit the hardest, we were in fiscal year 2009. FY 2007 and FY 2008 were growth years, and yes the extremely modest .05% rate cut would have gone into effect in those two years. The 50% exemption is not just for law firms, accounting firms, and lobbying firms, though the opposition picks these particular professions to use as their example in order to generate public disdain for the bill by enticing citizens to believe that they are getting the short end of the stick. In reality, LLC's and S Corps will receive this exemption, as well as sole proprietors. This consists of nearly all contractors, retail stores, bakeries, service businesses, manufacturers, etc. The opposition incorrectly claims that the bill's fiscal note was calculated using only certain types of business income. In reality, even people who own rental property and generate income from those properties should be eligible to take advantage of the exemption. The business income exemption does not go into effect immediately, as they suggest, but it does go into effect without the trigger. Only the first 10% of the exemption goes into effect for tax years beginning on or after January 1, 2014, and it takes five years to fully phase in to 50%. They conveniently fail to mention that the $1,000 exemption for individuals making under $20,000 and couples making under $40,000 also goes into effect immediately, and without a trigger.
There have been more claims made about the bill, all of which can be refuted, but seeing as this report is lengthy, and probably only a small percentage of the folks who receive this report will actually make it to this sentence, I will rest my case. I intend to vote to override the tax cut bill.
Feel free to contact me anytime at Scott.Fitzpatrick@house.mo.gov or by phone at 573-751-1488. Many of you knew my LA Ben. He is no longer with our office, as he has moved on to pursue other endeavors. Ben did a great job, and will be missed, but our district is fortunate to have a wonderful new LA working in our office. Her name is Marti Dupuis, and she can be reached at 573-751-1488 also. Marti is a former school teacher and has done a great job in the short time she has worked with me, and I am looking forward to the coming session, with her as my LA. We are here to help, so please get in touch if there is ever anything we can do.