House tax “reform” is a tax increase for Missouri businesses
On April 4, 2018, the Missouri House gave first round approval to HCS HB 2540 on a voice vote. Like the Senate version of the bill that received initial approval last week, SS#4 SCS SB 617, this bill contains many tax increases and decreases. Unfortunately for employers, any tax breaks provided in both bills appear to be paid for by higher taxes on employers and businesses.
Here is how the House bill breaks down from a business perspective, according to the fiscal note for the HCS HB 2540 and understanding we still need to do a very thorough review of the effect of the amendments on the House Committee Substitute:
Corporation income tax rate cut 6.25% to 5%: $55 million tax cut;
Loss of federal income tax deductibility (estimate for corporations only): $109 million tax increase (figures in FN for SCS SB 617);
Elimination of withholding timely filing allowance: $31 million tax increase to all employers;
Elimination of sales/use timely filing allowance: an unknown tax increase to retailers, primarily larger retailers; and
Elimination of the three-factor choice of apportionment formula will result in a tax increase of $142 million (while many companies that will be affected by this tax increase will be businesses that are primarily located out-of-state, it would also impact companies that may be large employers in Missouri if their overall percentage of payroll, property and sales is lower in Missouri than in other states).
NET RESULT OF HCS HB 2540: $85m tax increase to all corporation employers; UNKNOWN tax increase to retail corporation employers; Flow-through entities (S corps, partnerships, LLC’s, etc.) would be limited to a 5% business income deduction that would likely otherwise grow to 25% in future years (not included in total because amount is unknown). PLUS the bill would force corporation taxpayers to apportion income based on the single sales method, resulting in a tax increase of $142 million. There would also be a tax cut for businesses reporting income on their personal income tax returns of approximately 15% of their state income tax, but the amount of the potential tax increase due to limiting the deduction for business income is not available. Also, potential mistakes, as well as intentional changes, made to comply with the Streamlined Sales and Use Tax Agreement will have tax consequences. And all taxpayers would see a dramatic increase in registration fees on their vehicles for transportation improvements.
This robust House tax reform bill will be referred to the House Fiscal Review Committee. An additional amendment may be added that is expected to delay implementation of the bill until 2020, but we will have to see if that is for the entire bill or only certain parts.
Stay tuned and we will keep you posted of the progress of these various tax reform bills. All of the plans so far increase taxes for businesses and lower taxes for individuals.
“Associated Industries of Missouri has a long-standing and consistent policy of promoting lower taxes for Missouri businesses – not higher taxes,” said Ray McCarty, president and CEO of Associated Industries of Missouri. “While we believe our legislative leaders truly want tax ‘reform,’ representatives in closing comments on the bill admitted a mathematical fact: you cannot cut taxes for some without raising taxes for others. Unfortunately, it appears as a whole employers will be paying the bill for any tax relief provided by the bill. Given the additional potential for unintended consequences in the 400+ page bills in both the House and the Senate, we urge our legislative leaders to carefully review and understand the legislation before passing it and we will help in any way we can, but we will not support a tax increase on employers to lower taxes for others” said McCarty.
The tax increases proposed in both the House and Senate plans could equal or surpass the state’s largest tax increase on employers levied under the Carnahan administration to fund education, SB 380 in 1993. That bill boosted the corporation income tax rate from 5% to 6.25%, limited the federal income tax deduction to $5,000 for individuals and $10,000 for combined returns, and eliminated half of the federal income tax deduction for corporations. The House and Senate bills would both remove the federal income tax deductions entirely for most businesses and higher income individuals. While both bills would lower the corporation income tax rate, each corporation will want to calculate the impact on their business based on the apportionment formula they currently use and their use of the affected deductions.
Associated Industries of Missouri’s Tax Committee is currently reviewing both bills and we will keep you up to date as our reviews progress.