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Potential Bond Rating Impact of House Bill 253 Based on Flawed Assumption

Associated Industries of Missouri points out that there continues to confusion on the effects of House Bill 253, including on the part of the state’s bond rating agencies.

Standard and Poor’s Rating Services, Moody’s Investor Service and Fitch Ratings all issued letters in July, 2013, suggesting a possible downgrade of Missouri’s AAA credit rating if the veto of House Bill 253 is overturned by the Missouri Legislature. However all three rating agencies based this potential downgrade on the fictional assumption that taxpayers would be entitled to refunds for tax years prior to the effective date of House Bill 253, if certain conditions were met.

Specifically, the rating agencies stated they based their statements on assumptions by state officials that, should the federal Marketplace Fairness Act pass and the income tax rate is reduced by one-half percent, taxpayers would be entitled to refunds for three previous tax years. That assumption is legally flawed.

In fact, refunds for previous tax years would not be allowed under the Bill of Rights of the Missouri Constitution. Although the tax cut that is triggered by passage of the federal Marketplace Fairness Act is effective immediately, it would not, as some have claimed, result in refunds for previous tax years.

Article I, Section 13 of the Missouri Constitution is part of the “Bill of Rights”, the foundation upon which the people of Missouri grant power to their legislature and executive branch. The Missouri Constitution serves as a basis for all statutes. The Article states:

“In order to assert our rights, acknowledge our duties, and proclaim the principles on which our government is founded, we declare: Section 13. That no ex post facto law, nor law impairing the obligation of contracts, or retrospective in its operation, or making any irrevocable grant of special privileges or immunities, can be enacted.”

That section clearly states that the legislature has no power to enact a tax law that is “retrospective in its operation.” Any change in tax rate would only be available to taxpayers beginning with tax years occurring after the effective date of the law. The effective date of this contingent tax cut is August 28, 2013. There is no provision allowing for refunds for previous tax years and, if one had been included, it certainly would have fallen under constitutional challenge.

In practical terms, it is extremely unlikely that the Missouri Department of Revenue would even allow such refunds, given their lack of authority to grant them under the Missouri Constitution. Other laws that were enacted with clear legislative intent to be applied retroactively have not been applied in such a manner, presumably because of this constitutional limitation.

After the veto is overturned by the General Assembly, it is our hope that the state will provide this clarification to the rating agencies so they may evaluate the state’s credit rating based on application of the law as required by the Missouri Constitution.

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