BY: RUDI KELLER
Missouri Independent
No Democrats supported the bill, which also includes property tax relief for seniors and people with disabilities, on the final Missouri House vote
Missouri House Republicans muscled their biggest tax-cut priority of the year across the finish line on Wednesday, sending a bill exempting capital gains from income tax to Gov. Mike Kehoe.
No Democrats supported the bill, although 10 did vote “present” to show they supported provisions of the legislation other than the exemption on profits from the sale of property or investments held more than a year.
The bill applies to income received this calendar year, so it has a bigger bite into state revenue for the current fiscal year than it does for future years. The fiscal note for the bill estimates the change could reduce state revenue in the first year just under $430 million. In future years, the bill is estimated to reduce revenues by approximately $340 million annually.
House Speaker Pro Tem Chad Perkins, a Bowling Green Republican, sponsored the bill. In an interview after the vote, he said he was surprised that no Democrats joined Republicans on the 102-41 vote.
“There were a lot of Senate Democrats who voted for it,” Perkins said.
The tax cut vote came as the Friday deadline for passing the state budget approaches. During debate, Democrats said they are concerned that state revenues are stagnant and federal funding for many programs is in jeopardy.
“There are good pieces in this bill, but I fear it might be a pig that we put some lipstick on,” said state Rep. Stephanie Hein, a Springfield Democrat.
Citing estimates from a left-leaning think tank published in The Independent, Democrats also questioned whether the fiscal note truly reflects how much revenue would decline under the bill.
Federal tax data from returns filed for 2022 shows individual income tax filers from Missouri reported $13.3 billion in capital gains income. Allowing a deduction of that amount would reduce state revenue by more than $600 million if it is all taxed at the top rate of 4.7%
“I’m not sure that our budget can afford that, especially at a time when we’ve chosen not to fully fund our schools,” said state Rep. Kemp Strickler, a Democrat from Lee’s Summit.
Perkins said he also thinks the fiscal note is inaccurate, but for a different reason. The estimate does not account for increased economic activity from new investments made by people who retain the money, he said.
But he also acknowledged that the revenue reduction estimate could be inaccurate.
“The possibility exists that you are right as well,” Perkins said to Strickler.
Under the bill, individuals would receive the capital gains exemption immediately. Corporations would be exempt in the year after the top individual income tax rate declines to 4.5% under a state law lowering the rate when revenue growth hits a trigger amount.
Revenues are unlikely to trigger a one-tenth percentage point cut in the tax rate until 2028, the fiscal note states, making the corporate capital gains exemption unlikely until at least Jan. 1, 2030.
The capital gains exemption for individuals is estimated to reduce revenue by about $110 million annually. Corporations are expected to see their taxes reduced by about $180 million annually when the exemption is triggered.
The bill won votes from five of the 10 Democrats in the state Senate after the delay in the corporate exemption was added along with other tax cut provisions for lower-income Missourians.
They are:
- Increased credit amounts and income limits for the refundable property tax credit known as the “circuit breaker” available to people over 65 and people with disabilities. The changes included in the bill would reduce state revenue by about $84 million.
- A sales tax exemption for diapers and feminine hygiene products that would eliminate the 4.225% state portion of the tax. Local sales taxes would remain in place. The exemption would reduce state revenue by about $37 million annually.
The circuit breaker tax credit was established in 1973. People over age 65 and those who have a qualifying disability and rent their homes can claim a tax credit to offset property taxes of up to $750 if their income is less than $27,500. The credit for homeowners is up to $1,100 if they own their home if their income is less than $30,000.
The bill would increase the maximum credit for renters to $1,055. For homeowners, the maximum credit would be increased to $1,550. It would also increase the income limits for claiming the credit, to $38,200 for renters and $41,000 for homeowners, with slightly higher amounts allowed for married couples claiming the credit.
For the first time, the credit amount and the income limits would be indexed for inflation.
Most of the benefits from a cut in the capital gains rate for individuals would go to a small slice of taxpayers. The 23,800 federal returns filed for 2022 with incomes greater than $500,000 a year represent 0.8% of all returns but included 65% of the capital gains income.
State revenues are already trending lower for the current fiscal year, down more than 2% through Tuesday. If continued to the end of the fiscal year, revenues would fall about $300 million below estimates made in January.
Republicans who argued for the tax cut said they see no problem if revenues decline. The answer, they said, is to cut spending.
“I’m going to tell you,” said state Rep. Jim Murphy, a St. Louis Republican, “if you keep spending, and you keep spending, and you keep spending, we’re not going to be able to do the things we really need to do in this chamber, and that’s to help the people who deserve it.”
Democrats, however, said increases for the circuit breaker and the sales tax exemptions are attempts to mask a giveaway to the rich.
“No one’s sitting at any marble tables around the 73rd talking about capital gains tax,” said state Rep. Raychel Proudie, a Democrat from Ferguson. “They are talking about these eggs. They are talking about how they have to use the emergency room for their primary care physician. They do talk about that.”