On a voice vote, the Missouri Senate on Wednesday gave initial approval to SS#2 SCS SB 617, 611 and 667, a major state tax overhaul bill.
Sen. Bill Eigel (R-23, St. Charles County), one of the key sponsors of the bill, noted the importance of reducing income taxes as he talked through the various provisions of the bill. This most recent version of the tax reform bill would lower the corporation income tax rate from 6.25% to 5.25%, lower the individual income tax rate from 5.9% to 5.25% and establish a new “Missouri Working Family Tax Credit” equal to 10% of the taxpayers federal earned income tax credit.
The corporation income tax rate cut would amount to $44-48 million reduction in corporation income taxes. However, while the bill does cut some taxes, it also increases taxes, particularly those paid by businesses.
Corporations are currently entitled to deduct 50% of their federal income taxes from their state corporation income tax returns. That deduction is eliminated in the bill, raising corporation taxes by $109 million, according to previous fiscal notes on the bill. The bill also mandates corporations divide their income using the single sales method of apportionment, one of three choices available today. By mandating the use of the single sales formula, the corporation income taxes of multistate companies would increase by $141 million according to previous fiscal notes. While these businesses may have a majority of their property and payroll outside Missouri, they may still have a large presence in Missouri.
“Corporations that currently choose the three factor apportionment formula do so because their percentage of sales, property and payroll are less in Missouri than in other states,” said Ray McCarty, president of Associated Industries of Missouri. “But that does not mean the company does not have major payroll and property in Missouri – it simply means the percentage of that company’s payroll and property is lower compared to their property and payroll everywhere,” said McCarty. For this reason, the additional $141 million raised by forcing all companies to use the single sales factor formula will impact Missouri employers as well as non-Missouri companies that do significant business in Missouri.
Impact to businesses resulting from Corporation Income Tax changes:
- $109 million tax increase (elimination of the corporation federal income tax deduction + $141 million tax increase (apportionment formula changes) = $250 million in corporation income tax increases;
- $44-48 million in tax savings from a reduction in the corporation income tax rate;
- Net tax increase to corporations: $202-206 million.
The bill would also increase taxes on flow-through businesses (S corporations, partnership, sole proprietorships, etc., including many family businesses) due to limiting the federal income tax deduction and eliminating it entirely for incomes over $150,000. Many businesses that report their business income on their individual returns will likely exceed this threshold and lose the entire federal income tax deduction. The amount of this tax increase on businesses and higher income individuals is not able to be determined given the information in the fiscal notes accompanying the tax reform bills. The amount of the tax increase could be offset for some taxpayers by the reductions in the individual income tax rate.
The bill faces one more vote in the Missouri Senate before advancing to the Missouri House. Associated Industries of Missouri is working with the sponsors to let them know the impact of tax increases on employers in Missouri. We will keep businesses informed of the progress of our efforts.