Already leaning toward a veto, Democratic Gov. Jay Nixon raised a new objection Thursday to an income-tax-cut bill passed by Missouri's Republican-led Legislature — asserting it could result in a more than $200 million tax hike on prescription medications.
Nixon said his administration discovered the potential tax increase — an apparent technical mistake — as part of a routine but thorough review of legislation passed during the annual session that came to an official close Thursday.
"The out-of-pocket cost of prescription drugs, especially for those suffering from cancer, heart disease or other life-threatening conditions, already puts a strain on many Missouri families," Nixon said in a written statement. "That is why it is so troubling that House Bill 253 would repeal Missouri's long-standing sales tax exemption on prescription drugs."
He added: "This is a tax increase that Missourians cannot afford and don't deserve."
Supporters of the legislation reacted to Nixon's revelation with surprise and frustration.
Sen. Will Kraus, who was the main architect of the bill, said House sponsor Rep. T.J. Berry both said they never intended to repeal the existing tax exemption for prescription drugs and had no previous indication that the bill might do so. Kraus said the specific wording at issue actually was recommended by personnel in Nixon's Department of Revenue.
"This is as much the governor's slip up or mishap," said Kraus, R-Lee's Summit.
House Speaker Tim Jones said his staff had an email from the Revenue Department to legislative researchers suggesting the wording to which Nixon now objects.
"The governor really jumped the shark hard on this one," said Jones, R-Eureka. "It's pretty much his fault
But the Department of Revenue said Thursday that the wording it provided to legislative researchers would have protected the sales tax exemption.
Kraus, Jones and other bill backers suggested the governor should sign the bill into law and allow legislators to fix the error later — either in a September special session or during their 2014 regular session. They said there's no need for immediate concern, because the changes to the prescription drug taxes wouldn't take effect until 2015.
The legislation was a top priority this year for Republican lawmakers, who hold a supermajority in both the House and Senate.
The bill would phase-in a 50 percent deduction over five years for business income reported on individual income tax returns. It also would gradually cut Missouri's corporate income tax rate nearly in half over and lower the top tax rate for individuals from 6 percent to 5.5 percent over the next decade. The rate reductions for corporate and individual taxes would take effect only if annual state revenues continue to grow by at least $100 million over their highest point in the preceding three years.
Legislative researchers had estimated that the measure would reduce Missouri's potential revenues by about $700 million annually when fully implemented, but that analysis did not include the potential pharmaceutical tax increase. The governor had said previously that the lost revenues could jeopardize funding for essential state services such as public education and mental health care. He had indicated May 10 that he was likely to veto the legislation.
Page 2 of 2 - The newly revealed pharmaceutical tax could increase the likelihood that Nixon spikes the bill. The governor said Thursday that it's "only one of many red flags that the ongoing assessment of this legislation has raised."
"I think the governor is looking for any reason to veto the bill," said Tracy King, the vice president for governmental affairs at the Missouri Chamber of Commerce and Industry. But "this obviously is a big deal — taking away that exemption for prescription drugs is not something the chamber supports."
The Chamber of Commerce and Associated Industries of Missouri both urged Nixon to sign the measure and let lawmakers correct the error later. The prescription drug wording was included a lengthy section of the bill that would revise the wording of Missouri's sales tax laws so that it can join a multi-state compact in which retailers voluntarily collect taxes on online sales. Nixon has supported Missouri's participation in the streamlined sales tax initiative, which his budget office had projected to generate more than $10 million.
When drafting legislation, changes to Missouri laws are made by putting brackets around words and phrases to be deleted. In this particular case, the imposition of the pharmaceutical tax resulted from a misplaced bracket in the bill. The bracket was similarly misplaced in several other bills containing the streamlined sales tax wording, none of which ultimately passed.
Nixon's assertion that the bill could result in a $200 million tax increase was based on a 2009 report by the University of Missouri that projected the state would forgo $206 million in general revenues in 2013 as a result of a 3 percent sales tax exemption on prescription drugs. The actual figure could be higher, because Missouri's total sales tax is 4.225 percent. But actual figures are not available, said Nixon's budget director, Linda Luebbering.