Legislature considers axing corporate taxes

Corporate franchise tax

House Bill 458, passed Feb. 15 by the House Committee on Ways and Means, would phase out the corporate franchise tax over three years. The tax was eliminated in 1999 for Missouri’s smallest employers – corporations valued at $1 million or less – and reduced by one-third for all other employers.

The bill would eliminate the tax in 2008 for all employers with value up to $15 million, exempting about 12,000 employers. Starting in 2009, the tax rate for employers worth more than $15 million would be reduced by 50 percent, and the tax would be eliminated in 2010.

“The franchise tax is probably one of the best examples of double taxation,” said Tracy Weddle, director of taxation and fiscal affairs for the Missouri Chamber of Commerce and Industry, which supports the bill. “If your income or your total assets are more than $1 million, you pay (this tax). You’re already paying taxes on both of those items, so this is basically just a tax for the sake of doing business in Missouri.”

Corporate income tax

The HB 218 proposal would gradually eliminate the 6.25 percent corporate income tax by 2011.

Weddle said the Missouri chamber is in favor of HB 218 as well, mostly because of the economic development aspects of the bill.

“You’ll see a lot of that money (reinvested), expanding the economy and creating jobs,” she said, adding that the chamber is in favor of a significant rate reduction if the tax can’t be eliminated.

Fiscal impact

Both items would have substantial impact on state general revenues. According to fiscal notes attached to the two bills, HB 458 would reduce state general revenue by at least $148 million by fiscal 2010, while HB 218 would reduce general revenue by $169.5 million by 2010, assuming all other factors remain constant.

That’s partly why Rep. Brian Stevenson, R-Webb City, who sponsored the corporate income tax cuts, thinks his bill might have a harder time passing.

“The governor supported the franchise tax cut in his State of the State address, and I would expect it to get more attention this year,” Stevenson said. “There’s a lot of tax cut bills out there this year, and adding the income tax cut on top of that will be tough.”

Joe Haslag, University of Missouri economics professor and executive director of the Economic and Policy Analysis Research Center, said the business incentive of both bills could outweigh the lost state revenue.

“The franchise tax is the one that, from an economist’s standpoint, is the most desirable to get rid of,” he said. “It would stimulate a desire for Missouri firms to accumulate more capital – more buildings, more machines that produce more product.”

The corporate income tax reduction, he added, would have the added benefit of making Missouri more competitive with neighboring states.

“With St. Louis and Kansas City being the biggest business areas, if the tax remains high, I may want to set up my business to avoid that corporate income tax, which means on the Kansas or Illinois side (of the border),” Haslag said.

The 2006 corporate income tax rate in Kansas is 4 percent, while in Illinois the rate is 7.3 percent, which includes a 2.5 percent personal property replacement tax.