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Koster ruling surprising, but only one piece in tax cut opposition’s Doomsday scenario

Tax experts may be surprised by Attorney General Chris Koster’s opinion that a provision in HB 253 would apply retroactively.  The decision states that if certain conditions are met, language in HB 253 would retroactively change the income tax rate and allow taxpayers refunds of income taxes previously paid.

“General Koster’s opinion seems contrary to the normal course of action for the Attorney General whose constitutional duty requires him to represent the state in disputes over taxes,” said Associated Industries of Missouri president Ray McCarty.  “Usually, taxpayers are asking the courts to grant an exemption or lower taxes and the Attorney General argues against such claims – against taxpayers and in favor of the government.  I hope taxpayers are able to use this opinion in future disputes with the state over retroactive tax benefits.”

The Missouri Supreme Court has ruled in other tax cases that taxpayers may not avail themselves of tax benefits for periods before those benefits were enacted.  But the Attorney General has issued his opinion that taxpayers are entitled to retrospective application of the law.  We will be sure to keep this in mind in future tax disputes.

However, McCarty reminds opponents of HB 253, the first broad-based tax cut in nearly 100 years, that this opinion is just one of many steps that must occur before state revenues are lowered by $1.2 billion. “The Doomsday scenario promoted by opponents of our tax cut requires many things to happen – so many things, in fact, that their Doomsday scenario is unreasonable,” said McCarty.

As we stated in previous articles, ALL of the following would have to happen for the state to lose $1.2 billion in tax revenue because of this tax cut:

1.  Marketplace Fairness Act must pass Congress and be signed into law by President Obama.  Although the U.S. Senate has passed the bill, the U.S. House is not expected to pass the legislation, primarily over concerns this would be a tax increase for consumers that are not currently paying sales taxes on some internet sales.  Congressional leaders we have talked  to are not optimistic the measure will pass at all, and certainly not anytime soon; and,

2. The Missouri Department of Revenue (which is under authority of the Governor) must issue an Emergency Rule changing the rate and tax tables and allowing taxpayers to seek refunds for the previous three years.  The DOR would also have to file a concurrent Proposed Rule that would be subject to review by the Joint Committee on Administrative Rules which has the power to review rules that are not consistent with the Missouri Constitution or statutes.  Emergency Rules are allowed only if certain criteria are met, including:

  1. The Department of Revenue must find an immediate danger to the public health, safety or welfare requiring emergency action; or,

  2. The rule is necessary to preserve a compelling governmental interest that requires an early effective date; and,

  3. The DOR follows procedures which comply with the Missouri and United States Constitutions; and,

3. ALL 2.8 million Missouri taxpayers must file amended returns for the previous three years, resulting in 8.4 million amended returns.  It is very likely many taxpayers will not file the required amended returns and will not be entitled to any refund.  The amended returns and the refund requests made by these taxpayers would be subject to review and approval by the Missouri Department of Revenue; and,

4.  The DOR would need to process 11.2 million returns when they only process 2.8 million in a normal tax year.  While not impossible, the ability of the DOR to process this volume of returns in a timely manner is questionable; and,

5. The $1.2 billion loss assumes Missouri would collect NO additional revenue from the sales and use taxes on sales made to Missouri residents over the Internet as authorized by the federal Marketplace Fairness Act.  If any revenue is collected, it would help offset the cost of this tax cut.

As we pointed out in our earlier article, even if the courts agree with General Koster that retrospective application of the tax rate cut would be constitutional, there are MANY factors that must be satisfied to cause the $1.2 billion loss in state revenue opponents argue would ensue if the legislature overrides the veto of HB 253.  Because the loss of revenue is barely plausible, we question the need for withholding any of the budget moneys appropriated for education and other vital state services.  The state ended the fiscal year with a $339 million surplus.  Only $50 million of this amount will be needed to finance the tax cut, and only $200 million in the unlikely event the federal Marketplace Fairness Act becomes law.  Even with the tax cut, Missouri will still enjoy $140 – $289 million in surplus revenues that may be used to fund existing appropriations for elementary and secondary and higher education, as well as funding other vital state services.

Again, we ask everyone to consider how much money Missouri will lose if no action is taken.  If no action is taken and the veto is allowed to stand, Missouri will lose revenue each year as businesses gradually migrate to other states with more favorable tax laws.  We ask opponents how they plan to make up that loss of state revenue? If we do nothing, either the state budget suffers or taxes must be increased. Something to consider before supporting the veto of this quality legislation.

For more real facts on the legislation, please visit the “Taxpayers Research Institute of Missouri” tab on our website at www.aimo.com.

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