Tax cuts, federal reimbursement levy could divide Missouri legislature
The election-year fiscal agenda for Missouri lawmakers includes big ideas like eliminating the corporate income tax or sales taxes on groceries and targeted proposals like increasing a tax credit used by low-income seniors and the disabled.
The stakes in those bills are hundreds of millions of dollars, much of it earmarked for public schools or spent by local governments on services such as police and fire protection or road maintenance.
But the biggest item on the agenda as lawmakers return to Jefferson City this week is a set of medical provider taxes that funnel billions into the Medicaid program. The last time the bill vital to reducing Medicaid’s demand on general revenue was debated, it took a special legislative session to get it done.
Prior to that, the levy known as the federal reimbursement allowance had been renewed largely without controversy 16 times since it was first enacted in 1992.
Republican leaders in both chambers said in interviews they want quick action on the provider taxes. The state cannot afford to let politics interfere with the flow of funding that was worth $2.7 billion in the current budget, Senate Appropriations Committee Chairman Lincoln Hough said.
“I need to know that we’re getting this done as the committee is crafting a budget,” Hough said, “because if I have $4 billion that I have to cut out, then it’s going to be kind of painful, and we’re going to need to work on that.”
Senate Majority Leader Cindy O’Laughlin said she’s working to prevent a fractious debate over renewal of the reimbursement allowance. To do that, she must navigate in a Senate with five members running for statewide office, including two who will clash in the same primary.
“If there are things within (Medicaid) or different things that the state is doing that people would like to see changed, okay, well, work on those,” O’Laughlin said. “Don’t wait until it’s time to renew it and then say, ‘oh, I’m gonna hold it up for political points.’”
The state spent $12.9 billion in state and federal funds on Medicaid through the major budget lines in fiscal 2023, which ended June 30. The reimbursement taxes minimize the program’s draw on general revenue, which was $1.9 billion, or 14.6% of the total, in fiscal 2023.
With a budget surplus sitting at a healthy $6 billion, the state could continue operating for a year, perhaps two, without the reimbursement taxes before it would force deep cuts elsewhere in the budget.
The desire for more tax cuts, at least among the majority Republicans, is also putting pressure on that surplus.
“Within the Republican conference, at least in the House, there is a big appetite for cutting corporate taxes and just alleviating the tax burden on our citizens, whether that’s property taxes, personal property taxes, or sales taxes,” House Majority Leader Jon Patterson said.
Reimbursement allowances
There are four provider taxes that fall under the broad term reimbursement allowance.
The biggest, and the oldest, is a tax on hospitals. In the current budget, it accounts for $2.2 billion in direct appropriations for Medicaid.
The others are taxes on nursing homes, ambulance companies and pharmacies. Together, they are worth about $560 million annually.
In 2021, abortion opponents derailed debate on renewal by demanding policy changes for Medicaid as the price of passing the bill, seeking to exclude some contraceptive medications from coverage and trying to prohibit Planned Parenthood from providing services. The bill was finally approved, after a special session that opened fissures between Gov. Mike Parson and GOP leaders in the General Assembly.
A new political force in the legislature, the Freedom Caucus, seems “dead set on creating dysfunction and undermining government doing what government needs to do,” Hough said.
He worries they will hold the reimbursement allowance renewal hostage to their other goals.
“There’s a whole lot of saber rattling going on right now,” Hough said.
State Rep. Peter Merideth of St. Louis, the ranking Democrat on the House Budget Committee, said he’s also worried about disruption from the Freedom Caucus.
“I’m definitely concerned that that’s what we’re gonna see this session in the budget process, whether it’s over the federal reimbursement allowance or if it’s over the budget as a whole,” Merideth said.
State Sen. Denny Hoskins, a member of the new caucus and a Republican candidate for secretary of state, said he doesn’t expect a contentious debate on the reimbursement allowance bill.
“Hopefully that does not happen again,” he said, “and we can move forward with the FRA issue.”
Potential Missouri tax cuts
In September 2022, with the treasury holding a record surplus and revenues growing at double-digit rates, lawmakers passed a state income tax cut during a special session. The bill cut the top income tax rate to 4.95% for 2023 and, contingent on revenue growth, imposed future cuts until the rate was 4.5%.
Missouri met the revenue threshold in fiscal 2023 and on Jan. 1, the top rate declined to 4.8%. The timing of future steps is uncertain, however, with revenues stagnant.
If revenue grows by $200 million in the current fiscal year, the top rate would decline by 0.1% for 2025. But the revenue estimate released in December projects that general revenue receipts — $13.2 billion in fiscal 2023 — will decline by about $100 million in the current year, with only a slight rebound in the subsequent year.
If accurate, that means no additional state income tax rate cuts before Jan. 1, 2027, without new legislation. But even without additional rate cuts, lawmakers have continued to reduce income tax revenues by changing what is taxed.
Last year, Parson signed a bill exempting all income from Social Security and public pensions from income taxes. This year, House Ways and Means Committee Chairman Mike McGirl wants to expand that exemption to all retirement income.
“I don’t feel that we should give ourselves public pension breaks and not give the private individuals that have the 401(k)s or even IRAs saved that don’t have pension funds through their employer,” he said. “I just feel like you know, that those individuals should also be included in that exclusion.”
And Hoskins wants to reduce or eliminate the corporate income tax, which produced about $1 billion in revenue last year.
“Missouri has a spending problem, not a revenue problem,” Hoskins said. “Five years ago, the Missouri state budget was $27 billion. Now it’s over $50 billion.”
The opposition to additional tax cuts will come from Democrats and Republicans concerned that the surplus will evaporate, and future budget cuts will be necessary, if revenue is reduced too fast.
“I’m worried we won’t even be able to keep up with inflation, let alone try and actually make serious investments on things we’re falling behind on,” Merideth said.
The cuts made in past years need time to mature so the state has stable revenues, Hough said.
“When a handful of people say we need to cut taxes and cut taxes, I would like to remind them that we’ve cut about a billion and a half dollars in taxes in the last year and a half,” Hough said. “And we’re gonna start seeing some of those changes in our net general revenue collections over the next few years.”
Issues that bill filings show have bipartisan support include expanding the tax credit known as the “Circuit Breaker” that cushions the impact of property taxes on low-income seniors and people with disabilities. Unchanged since 2008, renters with an income of $27,500 or less ($29,500 for married couples) and homeowners with an income of $30,000 or less ($34,000 for married couples) are eligible for the full credit.
Renters are eligible for a credit of up to $750 and homeowners receive a credit of up to $1,100. It is phased out as income rises.
McGirl has filed a bill that would increase the income limit for a full
Rep. Peter Merideth, D-St. Louis, speaks in September 2022 during debate on a package of tax incentives for rural projects.
credit to $40,000 for homeowners and index both limits for inflation. Other bills would boost the income limit for both renters and homeowners, boost the credit amounts, and index them for inflation.
Last year, lawmakers passed a bill providing local-option tax credits to mitigate higher property taxes for older homeowners regardless of income. The circuit breaker is a mechanism for helping people least able to pay additional taxes, McGirl said.
“It’s more targeted, right?” McGirl said. “It’s more of a targeted component, instead of just the whole spectrum of individuals, whether they make $30,000 or whether they make $130,000.”
Tax changes that do not impact general revenue are also in the mix.
When Missourians purchase food, it is exempt from the state general revenue sales tax of 3% but all other sales taxes apply. Those taxes include the 1.225% state rate for schools, the Department of Conservation, parks and soil conservation plus city, county and special district taxes that can make the total rate on food as high as 10%.
Statewide, food is about 20% of the revenue for the sales taxes still imposed. Eliminating it would reduce funding for public schools by about $225 million from the 1% sales tax that is distributed on a per-pupil basis.
For some local governments, food sales could be much more than 20% of revenue.
McGirl said he would be skeptical of how that revenue would be replaced, or what local governments would do, if the food exemption passes.
“You have to be logical and you have to use some good, common sense reducing taxes,” McGirl said. “Sometimes the urge to do it is greater than what the outcome is going to be.”
Inflation and new sources of revenue — online purchases and marijuana sales — are pumping up local budgets and lawmakers would be justified in responding with a cut to food taxes, Hoskins said.
“Those local governments and municipalities have some of the highest revenue that they’ve ever recorded in the history of their town or city,” he said.
There is more agreement among Republicans on reducing personal property taxes, which are almost exclusively local revenue. A jump in used car values surprised thousands with higher tax bills and many of the bills filed for the coming session would change how those values are set.
“I would like to see personal property taxes cut just because I think once you’ve had a car for 12 years, should you continue to be taxed on it?” Patterson said. “I don’t think that’s the right thing to do.”
This story was first published at www.missouriindependent.com.