Income Tax Cuts for All Over Sales Tax Exemptions for Some

Admitting you were wrong isn’t easy – whether at home, work or, especially, in public service. This week’s about owning a mistake I made as your state representative – eight mistakes, to be exact.

Next week, when the legislature re-convenes for veto session, it may consider nine sales or other tax-related bills vetoed by Gov. Nixon. On the last day of regular session, I voted for all nine bills. During veto session, I will only vote to override one.

What changed? Well, it wasn’t Gov. Nixon’s bully-bludgeon tactics, or his sky-is-falling budget projections. Instead, the change can be attributed to two factors: (1) a bigger picture view of taxes and the budget, and (2) difficult to detect but devastating drafting errors in a few bills.

First, the big picture. There is justification for each of the vetoed sales tax bills. Many are attempts to re-set the law after changing interpretations by the Department of Revenue. When I voted for these bills in regular session, I considered the legislation narrowly – asking whether each made sense as isolated policies.

But I was wrong to view these bills in isolation. Each of these will reduce general revenues to the state without stimulating any meaningful economic growth. Worse, each of these bills is competing with the income tax cut we passed this year.

Under Senate Bill 509, your income tax rate will be gradually reduced from 6 to 5.5 percent. The reduction will occur over a series of years with the rate going down 0.1 percent annually – but only if General Revenue increases for the state by at least $150 million in the preceding year. As a result, for every dollar we reduce GR to “fix” a sales tax issue, exempt some new product from sales tax (graphic calculators as one obscure example in these bills), or create a new tax credit, we delay income tax cuts for everyone. Though some of these provisions make sense individually, I’m not going to choose tax cuts for donut shops, graphing calculators, data storage facilities, or any other particular narrow group over an income tax cut for everyone.

In addition to the “bigger picture,” several of the bills contain seemingly small but serious drafting oversights. Here are two for which there is conceptual consensus, but, alas, the devil lurks in the details.

Notice of Tax Change Fails to Define Notice

Senate Bill 662 and a few other bills contain a provision requiring the Department of Revenue to notify “all affected sellers” of goods that are determined taxable through a changed decision of DOR, the Administrative Hearing Commission, or a court. Unfortunately, this new section of law does not define “notify.” Because Missouri law requires tax provisions to be interpreted against the tax collector, a court would likely interpret this provision to require DoR to send notice via certified mail to an indeterminate group of taxpayers.

For example, the Supreme Court recently ruled that DOR had to enforce a sales tax on mobile home sales because they were not specifically exempted from the tax by statute. For this provision, proponents have argued that it defies logic for a Court to insist that DOR enforce the statute as written going forward because it hasn’t previously enforced the statute as it’s actually written. This is dangerous logic – and is the intellectual twin of President Obama’s arguments to re-write federal immigration law via executive action.

Under the new “notice” provision, DOR would be prohibited from enforcing the Supreme Court’s ruling that it must administer tax statutes as they are actually written unless and until it provided the undefined “notice.” While I agree that notice is warranted, ignorance of the law is not bliss. The legislature should re-visit this issue in January and pass a bill that defines “notice” in a way that does not require prohibitively expensive registered mail.

Burden of Proof Provision Goes Beyond Case-in-Chief

Under current law, for taxpayers with a net worth of less than $7 million or fewer than 500 employees, the Department of Revenue has the burden of proof in tax liability disputes to show that the taxpayer owes more money to the state treasury than they paid. Consistent with federal law, House Bill 1455 applies the same rule to all taxpayers. This is a concept with which I believe everyone should agree. In fact, in his veto letter, even Gov. Nixon noted that he agreed with “eliminating” this “arbitrary limitation” in current law.

But HB 1455 also shifts the burden of proof concerning claimed tax exemptions. In other words, it requires the claimant in a tax case (DoR) to prove a negative. This stands traditional legal process on its head. The existence of an “exemption” to a tax statute is an affirmative defense. The essence of an affirmative defense is the burden is on the party claiming the defense – to do otherwise requires a party to prove a negative.  I am not aware of any other substantive area of the law in which the burden is placed on a claimant to prove the non-existence of an affirmative defense. Therefore, though this provision is well-intentioned and the rest of the bill would be good law, I believe the legislature should revisit this issue in January and pass a slimmed-down version of the same bill.

Actions for Next Week

The sales tax bill for which I will vote to override Gov. Nixon’s veto is Senate Bill 727, which exempts purchases from farmer’s market vendors with annual sales of less than $25,000 from sales tax. For the other eight bills, if they come up for a vote, I will vote no. Looking to next session, I believe the legislature should take a serious look at replacing many tax credits and sales tax exemptions for narrow groups with income tax cuts for all.