The Missouri legislature enacted a bill on May 6 to reduce the personal income tax rate, overriding an earlier veto on the measure by Governor Jay Nixon.1 With a slim margin of victory,2 the legislators approved a reduction in the personal income tax rate by 0.5 percent and an individual income tax deduction of 25 percent of an individual's business income. Both measures, which are contingent upon the state meeting certain revenue goals, will be phased in over multiple years beginning in the 2017 calendar year.
Personal Income Tax Rate Reduction
The highest personal income tax rate, which is applicable to all Missouri taxable income over $9,000, is slated to be reduced by one-tenth of one percent per year beginning in 2017. The highest rate is currently 6.0 percent and will be reduced to 5.5 percent once five annual reductions are made.3 However, each reduction will only take place if the net general revenue fund of Missouri achieves specific fiscal criteria. Specifically, the amount of net general revenue collected by Missouri in the fiscal year prior to the year in which the tax rate reduction is made must exceed the highest amount of net general revenue collected in any of the three fiscal years prior to such fiscal year by at least $150 million.4 If the fiscal criteria are met, the tax tables will be adjusted accordingly, with the bracket for the top rate of tax being eliminated when the top rate of tax is reduced to 5.5 percent.5 Beginning with the 2017 calendar year, the Missouri personal income tax rate brackets will also be adjusted for inflation, with modifications effective on January 1 of each calendar year.6 Defined terms in the legislation include "percent increase in inflation," "CPI", and "CPI for the preceding calendar year."7
Business Income Deduction
In computing Missouri personal taxable income, a percentage of an individual's business income may be allowed as a subtraction from federal adjusted gross income beginning in 2017.8 "Business income" generally includes positive income from transactions in the regular course of a taxpayer's trade or business and is limited to the Missouri source net profit from the sum of: (i) the combined profit reported to the Internal Revenue Service on Schedule C; and (ii) the total partnership and S corporation income or loss reported on Part II of Schedule E.9 Shareholders of an S corporation or partners in a partnership will be allowed the deduction based on their apportioned business income in proportion to their share of ownership of the business.10 Beginning in 2017, if the net general revenue collected by Missouri exceeds the prescribed amounts described above, the allowable deduction for business income will be 5 percent of business income.11 The percentage will incrementally increase by 5 percent in each year that the net general revenue collection goals are met until the maximum deduction of 25 percent is reached (once five annual increases in the percentage are made).12
Additional Taxable Income Deduction
Also included in the legislation for tax years beginning on or after January 1, 2017 is a $500 deduction from taxable income for Missouri residents that are entitled to personal exemptions for federal income tax purposes and have Missouri adjusted gross income of less than $20,000.13 This deduction will go into effect irrespective of the level of net general revenue collected by Missouri.
Commentary
By overriding Governor Nixon's veto of this tax reduction legislation, the Missouri legislature was able to meet its publicly stated goal of reducing personal income tax rates. The legislature rejected the message contained in the Governor's lengthy veto letter14 specifying the rationale for his decision, arguing that the tax cut was unaffordable.
It is quite interesting that in order for these enacted reductions to actually take effect, the amount of general revenue collected in the fiscal year prior to the calendar year in which the reduction is made must exceed the highest amount collected in each of the three previous fiscal years prior to such fiscal year by a margin of at least $150 million. While not insurmountable, this threshold could certainly prove challenging to meet, especially if sales tax collections continue to stagnate. Whether the tax cut actually comes to fruition or remains simply ambition will not become clear until well after the 2016 elections.
Footnotes
1 S.B. 509, Laws 2014, effective August 28, 2014, overriding governor veto on May 1, 2014.
2 The Senate voted in favor of the override with 23 votes for the bill and 8 against enactment. The House followed suit, with 109 votes for the bill and 46 against, meeting the 108-vote requirement for an override.
3 MO. REV. STAT. § 143.011.2(1). The reductions may or may not be made in consecutive years.
4 MO. REV. STAT. § 143.011.2(2).
5 MO. REV. STAT. § 143.011.2(4). 6 MO. REV. STAT. § 143.011.3.
7 MO. REV. STAT. § 143.011.4.
8 MO. REV. STAT. § 143.022.2.
9 MO. REV. STAT. § 143.022.1.
10 MO. REV. STAT. § 143.022.3.
11 MO. REV. STAT. §§ 143.022.4; 143.022.5; 143.022.6.
12 MO. REV. STAT. § 143.022.4.
13 MO. REV. STAT. § 143.151. An additional $500 is available if the taxpayer is married and the spouse's Missouri adjusted gross income is less than $20,000. Id.
14 The veto letter is available at: Legislative Actions | Governor Jay Nixon.
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