Now all of a sudden Missouri Gov. Jay Nixon is concerned about certain businesses getting preferential treatment in the tax code. Specifically, in his veto of Missouri House Bill 253, Nixon said that it “…provides preferential treatment to select Missouri businesses, while discriminating against the majority of others based solely on the paperwork the businesses filed to organize.”

First, a quibble. Nixon says this “preferential treatment” will be discriminating against the majority of businesses in the state. That left me confused. How did the governor reach that conclusion? According to figures from the Missouri Department of Revenue, the state has 128,126 pass-through entities (including S-Corps). The total number of C-Corps is 68,185. By most rules of math that I know, 128,126 is a larger number than 68,185, so I can’t possibly see the governor’s point here.

Does HB 253 create preferential treatment for one type of business, as the governor fears? Eh, not really. Both the pass-through entity and corporate income tax cut are nearly the same amount. It is true that the corporate income tax cut only goes into effect if certain revenue targets are met, and it will take 10 years to be fully enacted instead of the five years for the business tax deduction. In the long run, however, the amount of the tax cut will be nearly identical. If the governor has evidence that this short-term difference will negatively impact Missouri businesses, he should present it.

It also is humorous that the governor is criticizing companies getting preferential treatment through the tax code. This is the same governor who extolled the benefits of the Mamtek deal, which was awarded $7.6 million in Missouri Quality Jobs tax credits and $6.8 million in Missouri BUILD tax credits. Economic development tax credits, by their very nature, give preferential treatment in the tax code. I wonder what brought on the change in outlook. The governor has voiced support for tax credit reform, but he hasn’t been hesitant to take credit for the supposed “benefits” that they create.

HB 253 is by no means a perfect bill, but it is a step in the right direction. Nixon has listed his reasons for vetoing the bill and hopefully I have conveyed how those fears are either imagined or overstated. Hopefully some kind of tax reform is enacted. Missouri cannot afford to wait too long.

Let’s make one thing clear: The state is required to have a balanced budget. If revenues do not meet current expenditure levels, then there will have to be cuts to the budget in order to match revenues. Governor Nixon fears that HB 253 will force deep cuts that will affect vital services. Governor Nixon’s fears are overstated.

First, there are revenue triggers in the bill that would prevent the full tax cut from taking affect if revenues did not grow. Governor Nixon warns that if the Marketplace Fairness Act is enacted and the top rates drop by one-half percent, then state revenues will suffer. If this did occur; however, then the rest of the individual and corporate tax cuts would be stopped and only the business tax deductions would continue.

Second, the state is looking to have a $300 million surplus at the end of the year, which means it currently has more than enough revenue to fund its current operations. Now whether we have a surplus next year depends on what the state plans to spend and the state of Missouri’s economy. However, right now, Missouri has a cushion to absorb a decline in revenue.

Third, the Governor’s analysis (at least in the veto message), does not consider the dynamic effects for lowering the tax rates. According to a paper by Mathias Trabandt and Harald Uhlig, increased economic efficiency can make up for some of the revenue lost due to a tax cut. I’m not saying this tax cut will pay for itself, but the economic research by Trabandt and Uhlig suggest that it is not unreasonable to suggest that the loss in revenue will not be as large as opponents fear.

It is also important to note that if the state kept to tight expenditure limits for future years, like increasing spending only by inflation and population growth, then it would be easier to live with diminished revenues. For example, the Show-Me Institute published a policy study by Stephen Moore and Richard Vedder on how Missouri could eliminate the income tax entirely by 2020 if it adhered to these expenditure limits.

Governor Nixon’s veto will hurt Missouri in the long run and I’m sure Kansas is grateful for his actions. However, the reasons behind Governor Nixon’s veto are flawed and if Missouri is to remain competitive, it needs measures like HB 253 to become law.

To the surprise of absolutely nobody, Missouri Gov. Jay Nixon vetoed Missouri House Bill 253, which would have cut individual and business income taxes. Nixon lays out the reasons he vetoed the legislation in his veto message. I will highlight some of his reasons.

First, according to Nixon, Missouri is already a low-tax state. I addressed this concern in an earlier post. In some areas, Missouri is a low-tax state; in others, it isn’t. Regarding income taxes, Missouri has a higher income tax rate than most of its neighbors, including Kansas and Illinois. If you factor in the fact that both Saint Louis and Kansas City have earnings taxes, the rates are significantly higher.

Second, Nixon claims that HB 253 would increase taxes on prescription drugs. Patrick Ishmael wrote a blog post concerning this issue. Officials with the Missouri Department of Revenue (DOR) say the legislation keeps the sales tax exemption in place. According to DOR officials, “the language provided to Legislative Research by the Missouri Department of Revenue protected the sales tax exemption for prescription drugs.” That’s also what I came away with; I read the bill.

Nixon also criticizes HB 253 for removing the sales tax exemption for college textbooks. That would be bad…why? I’m in favor of expanding the sales tax base and I don’t think college textbooks should be exempt from the sales tax. Yes, it would add more to the cost of going to college, but as a college graduate, I can assure you, textbooks were not the biggest cost factor for many of my peers and me (and I had scholarships).

I will have more to say about Nixon’s veto message. There is a lot in it to digest and the legislature will have its hands full if it wants to override the veto. However, while I do not think HB 253 is perfect, I do think it is a step in the right direction and will make Missouri a more attractive place to do business.

The Missouri Legislature did not approve Senate Joint Resolution 16, which would have raised the state sales tax by 1 cent to fund roads and bridges (among other transportation items), to be placed on the ballot in 2014. Missouri House Speaker Tim Jones (R-Dist. 110) has indicated that the issue will be revisited in the next legislative session.

It is important that Missouri maintain good roads and bridges. That is why I support transportation infrastructure spending. SJR 16 was an attempt to do that. However, my colleague, Policy Analyst David Stokes, and I did have misgivings about the proposal. Namely, we thought raising the sales tax to finance transportation infrastructure was not the right way to go.

Raising the sales tax to pay for transportation infrastructure would spread the burden of financing this spending evenly between those who frequently use roads and bridges and those who rarely use them. I don’t think that people who walk to work should have to pay the same amount for road maintenance as those who commute an hour each way.

When possible, and in the case of transportation funding it is possible, the external public costs should be internalized (i.e., linked to those who use the goods). That is why David and I support dedicated funding mechanisms for road construction and maintenance, such as tolling and increased gas taxes. Tolling isn’t a viable option for all of our transportation needs, but it has worked for the Lake Ozark Community Bridge and it can work for other projects. Increasing the gas tax instead of the sales tax would more closely align the act of using the road, bridge, or port, to those who pay for it.

It seems the St. Louis Post-Dispatch thinks business tax cuts amount to corporate welfare. That is NOT corporate welfare. Corporate welfare is the government giving subsidies, grants, loopholes, and other forms of preferential treatment to specific businesses. The Export-Import Bank is an example of corporate welfare.  At the state level, various instances of Tax Increment Financing (TIF) count as corporate welfare. However, letting a person or business keep more of what he/she/it earns is not corporate welfare.

That is not how the Post-Dispatch sees it. They believe that all money is the government’s money and that we should be grateful for the few cents they leave us.

The substance of the Post-Dispatch’s argument against business tax cuts? They claim there is little evidence to support the assertion that cutting business taxes will result in increased economic activity. Except this study by Jens Arnold found that corporate income taxes were one of the most economically harmful taxes a country can impose. And this study by the Tax Foundation analyzed the economic literature and found that corporate income taxes are the most harmful to growth.

Even one of the articles they cite to support their position states, in regards to start-ups creating jobs, “their decision to create a new job would be based on whether the long-term cost of that new job would be offset by higher revenues and profits.” Well . . . if a company has more money after taxes (because their taxes go down), what will happen to their profits? They will increase.

Tax cuts aren’t everything, and even if House Bill 253 becomes law, it alone will not cause our state’s economy to go gangbusters. However, tax rates DO matter, and no amount of screeching from the Post-Dispatch will change that.

With the passage of the “Broad-Based Tax Relief Act of 2013,” opponents of tax cuts are wasting no time blasting it. One of their chief claims is that if tax rates are so important to economic growth, then Missouri should be booming because of our already (supposedly) low tax rates.

Does Missouri really have low tax rates? The truth is, it kind of depends. Missouri has higher tax rates than its neighbors in some areas and lower rates in others. This matters because not all taxes have an equal impact on a state’s economic growth. Income taxes harm an economy more than a sales tax does. Thus, all other things being equal, a 7 percent sales tax rate would be less damaging to a state’s economy than a 7 percent top income tax rate. Missouri has a higher individual income tax rate than most of its neighbors. On the other hand, its state  sales tax rate is lower than most of its neighbors.

Tax cuts are not everything. With Missouri’s income tax rates higher than most of its neighbors, there is a real need for it to stay competitive. Missouri cannot afford to do nothing. The “Broad-Based Tax Relief Act of 2013″ is not perfect, but it is a step in the right direction, and contrary to what its opponents say, it is necessary.

Last year, at the height of the drought in Missouri, I wrote about Missouri Gov. Jay Nixon’s Executive Order authorizing government assistance for water sharing and distribution to farmers affected by the drought. I argued that the government should not be spending public money to assist those who already have (publicly subsidized) crop insurance.

Fast forward to today. One might think that due to the drought, farm incomes would be seriously hurt. However, that is not what happened. According to a recent survey (hat tip: St. Louis Post-Dispatch) that the St. Louis Federal Reserve released, farm income for the last quarter of 2012 was either on pace to match that of the previous year or even increase. A Kansas City Federal Reserve report had similar findings. The reason incomes did not fall: “Many bankers cited the effect of crop insurance in alleviating the expected negative impact of the drought.”

So, these farmers did not really need all that extra help last year. Their insurance was enough to cover their losses. I am glad that was the case. However, if many farmers are making more money after the drought than before it hit, couldn’t they afford to pay a bit more for their insurance premiums? Currently, taxpayers heavily subsidize crop insurance premiums.

I am not advocating eliminating crop insurance. However, cutting back on public support for crop insurance is a good idea. According to one Government Accountability Office report, a 10 percent reduction in government subsidies would have saved the taxpayers $1.2 billion in 2011. Buying insurance is meant to help prevent catastrophic losses, it is not meant to make you money. The government should reduce its commitment to paying for insurance subsidies; it seems the farmers can afford it.

It appears the Missouri House is set to approve a bill that would grant a tax break to gun manufacturers (hat tip: John Combest). My first reaction was that this is a stunt. Yet, worse ideas have come out of the Missouri Legislature so maybe the House is for real.

Stunt or not, this is a bad idea. According to the bill’s own sponsor, gun companies are moving because of strict gun regulations. There is no mention of the tax environment. No matter one’s opinion regarding gun control, giving tax dollars to companies that do not need them does not make sense. It is not like other tax credit programs have covered themselves in glory.

If the state really wants to make Missouri more appealing to all businesses, including gun manufacturers, it should eliminate business income taxes. That would be too simple, though, wouldn’t it?

The first step in overcoming a problem is admitting it exists. The state seems to give at least lip service to that via the Tax Credit Review Commission. But just when you think there might be hope to get our tax credit problem under control, you see stuff like this. Hopefully, this will not actually become law, but who knows at this point?

Because of increased revenue, the state of Missouri looks like it is on track for a surplus by the end of the current fiscal year. Great! Now the question is, what to do with it? The House and Senate are going back and forth on what to do with any projected surplus. Hopefully it is not plugged into the operating budget, but anything is possible. Of course, I have a modest suggestion.

How about using some of that surplus to pay off the state’s pension liabilities? The Missouri State Employees Retirement System (MOSERS), for example, has an unfunded liability of more than $3 billion (it is really much larger than that, but for the sake of argument, let’s go with the official numbers). Even if the state moved to a defined contribution (DC) plan immediately, the current liabilities in the pension remain.

Unless there is some kind of economic miracle between now and June 30, the surplus will not be $3 billion. However, a little money invested now can yield large savings in the future. Even using a 4 percent discount rate, a $100 million investment today will be worth more than three times as much in 30 years. It is the same principle as putting a larger down payment on a house. The larger up-front payment will mean lower total spending on the mortgage as a whole. That is a savings for future taxpayers.

A state surplus would be a good thing, but the state has an obligation to use any surplus responsibly. Helping to make sure our pensions are funded is a worthy goal and one worth pursuing.

In the high-stakes arena of legislating, the Missouri Senate and House are going heads up. In March, the Senate drew a pair of fives with Senate Bill 26, its version of substantive tax reform. It is a decent hand, but the House just one-upped the upper chamber.

House Bill 253, “The Broad-Based Tax Relief Act of 2013,” would eventually create a 50 percent deduction for pass-through entity income and cut the corporate income tax rate in half. Moreover, HB 253 ends up costing less in revenue. According to the Committee on Legislative Research-Oversight Division, the estimated revenue shortfall that would occur once HB 253 is fully implemented comes to $364 million. That is less than the $438 million in lost revenue that the state expects to occur if SB 26 were to be fully implemented.

I think HB 253 is a superior tax proposal to SB 26. Importantly, HB 253 cuts more in the areas that will produce the biggest immediate and long-term growth benefits. For its part, SB 26 creates a 50 percent deduction for pass-through income and reduces both the corporate income tax by .75 percentage points and the individual income tax rate by two-thirds of a percentage point over five  years.

Business income, i.e., profits, are the returns to capital owners after labor is paid. There is a strong academic basis for believing that taxes on capital, which business income is, are among the most economically damaging a taxing entity can impose. It is good that both SB 26 and HB 253 seek to enact cuts in these taxes. However, from a growth perspective, bigger business income tax cuts would better enhance the returns to capital owners and should be preferred to considerably smaller across-the-board cuts. HB 253 does this.

If legislators want to pursue a more ambitious proposal, they could also leverage the state’s tax credit liabilities against the tax that is left over after HB 253’s cuts. Combining HB 253 with the provisions of SB 120, which passed the Senate in March, the state could set out a course to enact further reductions in business income tax rates. Something to consider.

For those of you racing to finish and mail your tax returns in today, you have my sympathies (not that you would notice because you probably are struggling to get all your paperwork out the door and are not reading this blog). I know nobody — except maybe your accountant (I am looking at you, H&R Block) — actually enjoys dealing with tax returns, but they are as constant as the Northern Star. However, not many people really know the true cost for all of us to do our taxes.

According to the IRS’s own numbers, most taxpayers have to spend an average of 16 hours to collect their records, do their tax planning, and fill out their actual forms. For businesses, that number jumps up to an average of 23 hours. Taken together, taxpayers spend a total of 6.1 billion hours doing their taxes. Talk about a lot of time that could be spent doing more productive things.

However, that is not the whole story. If you think April 15 is the end of your tax nightmare, think again. According to the Tax Foundation, Americans will have to work until April 18 to earn enough money to pay their tax bills. So even after they file their tax returns, the American people will have to work an extra three days to pay their share to the government.

The government needs money to function, but 3 1/2 months of income is a bit much (to put it lightly) and there is no reason why doing one’s taxes should take more than 16 minutes, never mind 16 hours. To save us time, money, and the prospect of even more inane commercials, policymakers should give us a break and fix the tax code.

Late last month, a New York Court of Appeals ruled that the state of New York can force online retailers such as Amazon.com and Overstock.com to collect sales taxes, even in states where the retailer does not have a physical presence. This sets up a potential showdown at the U.S. Supreme Court because this ruling conflicts with an earlier Supreme Court decision stating that states cannot force retailers to collect sales taxes in which they are not located.

If the Supreme Court rules that states can impose an online sales tax, expect to start paying more. In Missouri, the Senate approved a bill that would force online retailers to collect sales taxes; the House is considering the proposal now.

I have been going back and forth on the prospect of paying sales taxes on my Internet purchases. I am sympathetic to proponents’ arguments that say the tax code should not favor one type of business over another.

However, these types of taxes can be really complicated. There is also a decent chance that they will not generate much money. After one study in Illinois estimated that the state would collect $153 million, it turned out that after instituting a tax on e-commerce, it was on track to collect just  $6.4 million from the tax, a mere 4 percent of the original estimate (hat tip: Illinois Policy Institute) .

Again, I am sympathetic to the idea of ending tax preferences in the tax code. However, if the cure is worse than the disease, which these types of taxes are starting to look like, the state should take a pass.