House takes on third tax cut this week

After previously approving two tax cuts that would reduce state revenue by an estimated $460 million annually, the Missouri House this week will tackle a tax bill that would cut state and local sales taxes paid by businesses.

A tax cut for senior citizens would exempt Social Security payments and some other retirement income from income tax. A tax cut for businesses would raise the threshold and lower the tax rate on the franchise tax, a levy on business assets. They await Senate action.

But unlike those two measures, the official estimated cost of the tax bill in front of lawmakers this week is "unknown."

The bill, to exempt utility costs paid by manufacturers from sales taxes, is a top priority of the Missouri Chamber of Commerce and the Cape Girardeau Chamber of Commerce. The bill would also exempt "chemicals, machinery, equipment and materials used or consumed in the manufacturing, processing, compounding or mining or producing" any product, used to process recycled materials or used in research and development.

The bill will be the second measure debated by the Missouri House when it turns to bills awaiting possible amendments this week.

The tax cut is raising questions among local government officials who see the potential for a major loss of revenue.

For Cape Girardeau, the loss would be an estimated $110,000 annually out of sales tax revenue of $19 million, said John Richbourg, city finance director. The estimate was completed Thursday, Richbourg said, and city leaders haven't had time to digest the potential impact.

"Right now it is to the point where the information needs to get back to the city manager and go from there," Richbourg said. "But I am sure we are not going to be happy with it because our budgets are tight anyway."

Cape Girardeau County officials are also trying to get a handle on the costs. About 6 percent of the $6 million general revenue sales tax the county receives annually comes from taxes on utility purchases. The county is working to determine what share is paid by manufacturers, said Robb McClary, assistant to the county commission.

When county officials were first asked by local and state chamber officials to support the measure, they were told it would greatly benefit Procter & Gamble. But the bill isn't aimed at helping any particular business, said Daniel Mehan, president of the Missouri Chamber of Commerce and Industry. The tax break is an important tool for economic development, Mehan said, because Illinois is the only state adjoining Missouri that doesn't provide the same tax break.

"This is a major boost to Missouri manufacturing companies," Mehan said. "It is the sector that needs the help the most."

The chamber is portraying the bill up for debate this week as having a cost of $10 million to $13 million, but acknowledges that it is only a guess. Neither the Missouri Department of Revenue nor economists at the University of Missouri-Columbia was able to calculate the impact of the tax break.

The Missouri Municipal League didn't testify against the bill but is concerned about its impact, said the league's Patrick Bonnot. "It is our hope to shine the effects on the cities so they are aware of what will happen," he said. If lawmakers "are here making decisions without knowing the effects, it is going to be bad."

To support the argument for the bill, Mehan and the chamber cite figures that Missouri has lost 65,000 manufacturing jobs since 2000. "Anything used to make the product should be tax exempt on the front end of the product," said Tracy Weddle, director of taxation and fiscal affairs for the chamber. "That is the way the tax law was meant to be, and we have gotten away from that."

Missouri sales taxes are a mix of state and local levies that are not uniform statewide. The state's portion is 4.225 percent, while local taxes can add 3 percent or more to the total charged. There are dozens of exemptions, with many aimed at consumers, such as the exemption for prescription drugs. Others are more narrowly drawn, such as the exemption on electricity consumed by manufacturers when the costs exceed 10 percent of the total costs of production.

Most sales tax exemptions cover all sales taxes. The exemption for food purchased at grocery stores, however, is limited to the 3 percent tax for general state purposes. Lawmakers left the local taxes on food in place because removing it would have invited lawsuits from local governments that the legislature was violating the state constitution by taking away their revenue. Sales taxes on food were estimated to be as much as a third of local revenue.

While the tax bill up for debate this week is portrayed as a break for manufacturers, two Missouri Supreme Court decisions in 2002 and 2005 have greatly expanded the definition of a manufactured product. The rulings declared equipment used to transmit telephone calls is exempt from sales tax because a telephone call is a product, not a service. As a result, telephone companies will receive $280 million to $300 million in tax refunds, with about two-thirds of the money coming from local governments.

State Rep. Nathan Cooper, R-Cape Girardeau, said he supports the tax bill that is up for debate this week but wants it to apply only to traditional manufacturing. "I'm working to ensure that the language in the bill does not encompass unintended aspects of the tax code and that it is solely for the elimination of the tax on utilities used in the normal course of manufacturing."

rkeller@semissourian.com

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