Missouri/Kansas Border War – “Truce” bill may be unconstitutional

January 3, 2014 – Much has been written about the so-called “border war” between Missouri and Kansas, and whether or not tax incentives should be used to attract businesses from one state to the other.  The conversation often involves incentives in the Kansas City metropolitan area, where only State Line Road divides the two states.

Political leaders and economic development officials on the Missouri side of the border have called for an end to such incentives.  Kansas Governor Brownback has recently indicated he may be willing to engage in discussions calling a truce in the border war.  Missouri Governor Nixon in a recent speech decried incentives that are used to simply move jobs across the state line and pledged to support legislation to end the use of incentives, if Kansas will do the same.

A little over a year ago, Governor Brownback made it clear in an interview with KMBC-TV that his successful effort to reform income taxes in Kansas were not on the table for discussion in any truce, but he left the door open to discuss special incentives.

Last session, Associated Industries of Missouri worked hard to pass a broad-based tax cut bill that would have helped every Missouri taxpayer, including all employer taxpayers in Missouri.  That bill, HB 253 sponsored by Rep. T.J. Berry (R-38, Kearney), was vetoed by Governor Nixon and the Missouri House of Representatives failed to override his veto.  As a result, Missouri does not have a tax structure that is able to compete with the reformed Kansas tax system, especially when it comes to high growth, highly profitable small and mid-sized employers who pay no Kansas income taxes.

Senator Ryan Silvey (R-Kansas City) filed SB 635 to be considered in the 2014 Missouri legislative session that starts Wednesday.  The bill seeks to codify the truce in Missouri law, contingent on passage of a similar law in Kansas.   The bill would deny tax incentives to employers that move jobs from four border counties in Kansas to any of four border counties in Missouri.  Employers moving the same types of jobs from another county in Kansas or anywhere else to Missouri would still be eligible for benefits, but those moving from the Kansas counties of Douglas, Johnson, Miami or Wyandotte would be barred from receiving incentives for those jobs.

The effect of the law will be to deny a tax benefit to employers moving from these counties to Missouri, while allowing similarly situated employers moving from other locations to enjoy the benefit.

Many question the goal of such legislation.  Is it a good idea to lay down your arms when you are losing a battle?  Assuming this is a good idea, is it constitutional?  Can a law be enacted that denies a tax benefit to some out-of-state employers while giving tax breaks to competitors moving from other areas?  Wouldn’t such a law be discriminatory?

To find the answers, I turned to the AIM Tax Committee.  The AIM Tax Committee is comprised of more than 100 of the finest tax practitioners, tax lawyers, and accountants in Missouri.  It turns out many believe such a law would have constitutional problems and could be voided by the courts.

Members of the AIM Tax Committee that responded to the inquiry overwhelmingly agreed such a law would raise serious constitutional questions, especially with regard to the Commerce Clause or constitutional provisions guaranteeing equal protection.  The Equal Protection Clause is part of the Fourteenth Amendment to the United States Constitution. The clause, which took effect in 1868, provides that no state shall deny to any person within its jurisdiction the equal protection of the laws. The Commerce Clause, found in  Article I, Section 8, Clause 3 of the United States Constitution states,”[The Congress shall have Power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes.”

Prominent tax attorney and former Missouri Director of Revenue Janette Lohman with the law firm of Thompson Coburn LLP responded the law “…might be facially void under the Commerce Clause.”  She continues, “Accordingly, it might even be a violation of the Missouri Constitution, Article X, Section 3, because they would not be treating similarly situated taxpayers in the same manner.  That is, a company that relocated here from Illinois could qualify but a company that relocated here from one of the four counties in Kansas could not?”

Jeffrey Dardick, State and Local Tax Partner at PricewaterhouseCoopers agreed with Lohman.  In a detailed response, Dardick analyzed recent court cases involving state laws that allegedly violated the Commerce Clause of the United States Constitution.    The “negative” or “dormant” Commerce Clause implicitly limits a state’s right to tax interstate commerce, according to a ruling issued by the U.S. Court of Appeals for the Sixth Circuit in Cuno v. DaimlerChrysler, Inc.  In that case, the Court ruled “discrimination” means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.  You may read Dardick’s full analysis and summaries of several interesting cases by clicking here.

Kevin Boyer, Partner at Ernst and Young, questions whether the law would be found to be in violation of the Commerce Clause.  “In this situation, the state’s taxing methodology is not changing based on where a company is located, just the amount of incentives available are changing, and I’m not sure that can be challenged under the Commerce Clause,” said Boyer.

Ray McCarty, president of Associated Industries of Missouri said, “At Associated Industries of Missouri, we believe we should use all tools at our disposal to attract and retain quality Missouri employers and the jobs they create.  We believe the best solution is a taxpayer-friendly tax structure that benefits all existing employers as well as the new ones we want to attract.”  One AIM Tax Committee member put it this way: “Business relocation is based on a variety of issues. Immediate tax incentives are just part of that. The long term tax structure is also a large part of that decision.”

As to whether the concept of a truce is worth pursuing, another member said, “I think Missouri would welcome a western Illinois business relocating to St. Louis.  I can’t imagine why the western side of the state would be offended by a relocation from eastern Kansas.”  And one member from a prominent accounting firm in the Kansas City area said, “As someone who is in the trenches of this situation, I find this bill silly as well.  I think Missouri is pushing for this because they continue to lose out to Kansas and have for years.”

Any tax professional employed by any AIM member company may be a part of AIM’s Tax Committee.  The goal of the group is to share ideas, stay informed on all issues affecting employer tax liability, and to weigh in on new issues.  We conduct regular meetings with state tax officials to resolve problems quickly and before they become major problems.  To join AIM’s tax committee, contact Ray McCarty at 573-634-2246 or send an email to rmccarty@aimo.com indicating your interest in joining the tax committee.

About Ray McCarty

I am President/CEO of Associated Industries of Missouri in Jefferson City, Missouri. I like to CUT taxes, not increase them!
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