Gov. Nixon announced Tuesday that SB 509 contains a “fatal flaw” which should prevent the legislature from overriding his pending veto of the bill. This flaw relates to language in proposed §143.011.2(4), which provides, “The bracket for income subject to the top rate of tax shall be eliminated once the top rate of tax has been reduced to five and one-half percent.”
Gov. Nixon reads this provision in isolation to argue that it eliminates all income taxes in Missouri for income above $8,000 per year once the gradual steps down to 5.5 percent are completed. In making this argument, Gov. Nixon is well-aware that this is not the intent of the General Assembly, and with 16 years of experience as the state’s top lawyer, he’s also well-aware that Missouri courts do not examine statutory provisions in isolation. Instead:
The cardinal rule of statutory construction is that the intention of the legislature in enacting the statute must be determined and the statute as a whole should be looked to in construing any part of it. Words are to be given their plain and ordinary meaning whenever possible. Where the words of a statute are capable of more than one meaning, the courts give the words a reasonable reading rather than an absurd or strained reading.” JS v. Beaird, 28 S.W.3d 875, 876 (Mo. banc. 2000).
“Each word, clause, sentence, and section of the statute will be given meaning, and (Missouri courts) will not interpret (a) statute in a way that renders some phrases mere surplusage.” Farish v. Mo. Dep’t of Corrections, 416 S.W.3d 793, 796 (Mo. 2013). “Consistent with these principles, a sentence should not be given meaning that thwarts a section; a clause should not undermine a sentence.” Middleton v. Mo. Dep’t of Corrections, 278 S.W.3d 193, 196 (Mo. banc. 2009).
In support of his interpretation, Gov. Nixon enlists a letter from Prof. Cynthia Block from Washington University School of Law in St. Louis. It is telling that neither Gov. Nixon nor Prof. Block mention the duty of Missouri courts to examine statute in context to avoid absurd readings and interpretations that render some provisions meaningless.
How Nixon’s Interpretation Would Lead to Absurd Results and Render the Pass-through Tax Cut Meaningless
Where the words of a statute are capable of more than one meaning, the courts gives the words a reasonable reading rather than an absurd or strained reading.” JS v. Beaird, 28 S.W.3d 875, 876 (Mo. banc. 2000).
Putting proposed §143.011.2(4) in context illustrates how Gov. Nixon’s interpretation would lead to absurd results. First, the reductions are limited to “one-tenth of a percent” and “no more than one reduction shall occur in a calendar year.” See proposed §143.011.2(1). Second, the reductions “shall only occur if the amount of net general revenue … (increases) by at least one hundred fifty million dollars.” See proposed §143.011.2(2). Third, the other significant tax relief provision in the bill allows individual taxpayers who receive income from a pass-through business entity to deduct up to 25 percent of income received from the pass-through from their federal adjusted gross income. See proposed §143.022. It does so through the same measured stair-step approach as the reduction in individual income tax rates.
Nixon’s interpretation would require a Missouri court to examine the careful stair-step approach of §143.011.2 and conclude that, instead of intending to ensure that general revenue would not be starved from tax reductions, the legislature really intended to take a series of small nibbles at the top marginal tax rate followed by a gigantic bite. In the first four years, the court would find that the legislature intended to reduce the rate by 1/60th in careful steps, then suddenly, in year five, reduce the top rate by 56/60th’s. Taken in context, this is an absurd result.
· Each word, clause, sentence, and section of the statute will be given meaning, and (Missouri courts) will not interpret (a) statute in a way that renders some phrases mere surplusage. Farish v. Mo. Dep’t of Corrections, (Mo. 2013).
Nixon’s interpretation would also require a court to conclude that the legislature enacted the second tax relief provision even though it would have no significance if income above $8,000 could not be taxed. If SB 509 is interpreted in the strained manner Nixon fears, there is no actual tax relief to any individual who receives pass-through income in excess of $10,666. Thus, Gov. Nixon’s strained interpretation would render proposed §143.022 meaningless for the vast majority of Missouri small business owners.
Prof. Block’s Letter Reveals the Only Reasonable Interpretation Consistent with Legislative Intent which Would Render the Entire Statute Logical and Give Effect to Every Part of SB 509
· Where the words of a statute are capable of more than one meaning, the courts give the words a reasonable reading rather than an absurd or strained reading.” JS v. Beaird, 28 S.W.3d 875 (Mo. banc. 2000).
Prof. Block writes, “For tax purposes, the term ‘bracket’ has a technical meaning quite distinct from ‘rate.’ The former, represented by the left-hand column in most tax tables, refers to a specified range of taxable incomes to which a particular tax rate applies.” Under this interpretation, a tax bracket is only a category of income subject to some level of taxation. Thus, if the tax rate for a certain range of income levels is zero, according to Prof. Block, there is no “tax bracket.”
This definition, however, is inconsistent with another Missouri statute, case law, and the dictionary definition of “bracket.”
Despite there being no direct definition of “tax bracket” in Missouri statutes, there is an implied definition. For the collection of sales taxes, §144.285 requires the director of revenue to “establish brackets, showing the amounts of tax to be collected on sales of specified amounts.”
A previous version of the sales tax statute set the first bracket as follows:
144.285. Brackets for collection of tax. – 1. In order to permit sellers required to collect and report the sales tax to collect the amount required to be reported and remitted, …, the following brackets shall be applicable to all two percent taxable transactions: (1) On sales of less than twenty-five cents no tax shall be added.” Automatic Retailers of America, Inc. v. Morris, 386 S.W.2d 901 (Mo. 1965).
In Automatic Retailers, Missouri’s then Director of Revenue argued that this “zero bracket” for sales less than 25 cents was not actually a bracket with a zero tax rate. The Missouri Supreme Court rejected the argument, upholding the bracket of zero percent.
Contrary to Gov. Nixon, the only reasonable interpretation of the definition of “tax bracket” in SB 509 is that the phrase denotes an income point at which a different tax rate will be applied. Under this interpretation, creating a tax rate of zero for income above $8,000 does not eliminate the top tax bracket. Instead, it applies a different rate to the existing bracket. Under this reasonable interpretation, a court would reject Gov. Nixon’s interpretation of SB 509 as setting the top bracket to zero because that would not actually eliminate the bracket and effectuate the intent of the statute. Instead, it would merely change the rate for the top bracket.
This more reasonable interpretation is also consistent with the dictionary definition of “bracket” as “a section of a continuously numbered or graded series.” See Merriam-Webster’s Online Dictionary. The word “section” is defined as “one of the parts that form something.” See Merriam-Webster’s. It connotes the action of “cutting or separating by cutting” so as to show distinction with other parts. To “eliminate” the top tax bracket under this interpretation would be to tear down the wall of separation between the current top rate which would no longer exist and the new top rate.
Is the rule of statutory construction that tax laws should be construed strictly against the taxing entity iron-clad, or is it subject to other rules of statutory construction?
As the Missouri Supreme Court has explained, “Rules of statutory construction cannot be rigidly applied. Most often, for every rule suggesting one resolution, another rule exists that suggests the contrary. ” South Metropolitan Fire Protection District v. Lee’s Summit, 278 S.W.3d 659, 666 (Mo. 2009).
Although tax laws are to be strictly construed against a taxing entity, this rule is not iron-clad. Like other rules of statutory construction, the tax statute rule must give way to “the cardinal rule” of statutory construction” – that the intent of the legislature be determined by examining “the statute as a whole” and, where words of a statute “are capable of more than one meaning, the courts give the words a reasonable reading rather than an absurd or strained reading.” J.S. v. Beaird, 28 S.W.3d 875, 876 (Mo. banc. 2000).
“Taxing statutes should be construed strictly against the taxing authority unless a contrary legislative intent appears.” Union Electric v. Coale, 146 S.W.2d 631, 635 (Mo. 1941)(Interpreting statute against taxing entity.) Put another way, “[t]ax laws are to be construed strictly against the taxing authority; however that rule does not require that statutory language be ignored and not given meaning that reasonably accords with the apparent intention the legislature expressed in the statute.” L & R Distributing v. Department of Revenue, 648 S.W.2d 91, 95 (Mo. 1983) (Interpreting statute in favor of taxing entity.)
No rule of statutory construction is iron-clad save for “the cardinal rule” – that courts must give effect to the intent of the legislature. Regarding SB 509, it is clear that the intent of the legislature is not to make the tax rate zero for all income above $8,000, but instead to gradually reduce the top rate contingent upon economic growth and then adjust the brackets accordingly to remove the section divider currently placed at $9,000 of income.