DALLAS -- Missouri residents will vote Tuesday on a tax revenue limitation amendment that could result in more than $1 billion in state budget cuts next fiscal year and severely curtail bond issuance in the region.
"If the amendment is approved, it's a virtual consensus that the bond business will dry up for 12 to 24 months or potentially longer," said James Moody, a former Missouri budget director who analyzed the tax and revenue proposal for the measure's opponents. "There will be no market."
The ballot proposal, the Hancock II Amendment or Amendment 7, would revise the existing state tax revenue limit that Missouri voters approved in 1980. Called the Hancock Amendment because it was promoted by U.S. Rep Mel Hancock, R-Springfield, the 1980 constitutional change specified that Missouri taxes could not amount to more than 5.6% of the total personal income of the state residents.
While the Hancock II amendment does not revise that formula, it would place more state fees and taxes under the limit, requiring Missouri to rebate to its citizens in their income tax returns any money that exceeds the cap. That could result in draconian state budget cuts, a dramatic reduction in public projects and bond proposals, and more lawsuits challenging public spending.
"We wanted them to abide by the limit," Hancock said. "We are saying: 'Here's the limit, boys, and you can't raise the limit without a vote,'"
Since 1910, Missouri has circumvented the original amendment by excluding some taxes from the cap, including sales taxes for public schools and a gasoline tax. Because the state kept taxes under the constitutionally mandated limit, it was able to institute Gov. Mel Carnahan's recommendation to raise income taxes by $310 million.
"We saw the largest tax increase in history in May 1993," Hancock said, if both Missouri and federal income tax hikes are added together. "We wanted Hancock II because of those two tax increases."
But opponents, investment bankers, and several government officials said the amendment iS not a simple tax limitation proposal. Instead, they said it is a complicated set of revisions that will end up significantly cutting school, prison, and highway budgets, and putting the state's bond industry in a gridlock.
"If it passes, the state of Missouri will be forced to cut $1 billion from its budget starting July 1, 1995." said Mark Ward, the state's budget director. "We will also lose hundreds of millions in federal dollars."
Many programs would see a one-third reduction in funding, Ward said, including education, corrections, and some social services, because those programs account for the $3 billion of the $12 billion state budget that is not subject to federal and state mandates.
Among predictions if the amendment passes: 9,000 teachers fired; 125 school districts closed; three of 12 prisons shut down; and annual losses of $140 million in state highway funds and $60 million in road and bridge funds for counties and cities.
HancoCk has a simple response to these predictions: "There are a bunch of people doing a lot of lying."
He said a study done by the Cato Institute in Washington, D.C., showed that the Hancock II amendment would have a financial impact of $134 million in fiscal 1996, not the $1 billion to $5 billion that opponents cite. "No one agrees with that. It is just puffery," Hancock said.
But Ward and Moody said that almost every credible study predicts an impact of more than $1 billion and that the figure could rise to $5 billion if the amendment is interpreted to include federal funds in the cap.
"It's simple math," Ward said. Added Moody: "The Cato report is a piece of garbage."
Behind all the political rhetoric is a complicated amendment that has investment bankers and local government as well as state issuers nervous. The state of Missouri already has delayed issuing some $250 million of general obligation bonds for higher education, corrections, and youth detention approved by voters in August until the election results are in.
Ward said the state won't have the funds to operate those facilities even if it can build them if the Hancock II amendment is passed.
He also said local governments are worried that a decrease in state aid would affect their budgets and ability to realize public improvements.
A primary concern is that residents could challenge any rate or fee increase in court and proceeds from revenue bonds would have to be held in escrow until a legal decision was made.
"If revenue bonds are harder to issue because of the litigation problem, issuers may have to take some other route," said James Byrne, general counsel for the Metropolitan St. Louis Sewer District.
Other impacts on the bond industry also are likely to occur, government officials and investment bankers said.
"You are putting into motion a disaster," said Spencer Burke, head of public finance for Edward D. Jones in St. Louis. "You are talking about a gridlock for a year in the bond industry."
He said bond issues could get tied up in court for years, and underwriting fees in the state of Missouri could fall by $20 million or about 50% next year if the tax revenue limitation measure is passed by voters.
Russell Brown, manager of public finance for Missouri for George K. Baum & Co., said he also expects already lower volume to fall if the amendment is passed. "I don't think the industry needs a further reduction in volume," he said.
In addition to fewer local and state bond issues in the future, there is some debate on payments for outstanding bonds. "It does not invalidate existing bonds, but it doesn't guarantee money will be there in the future to pay," said Moody, who also consults with A.G. Edwards & Sons Inc.
However, budget director Ward has a different point of view. "It won't affect our ability to pay debt service," he said. "It is a top constitutional priority in Missouri."
Of course, many opponents are hoping these types of things never become an issue and that the polls are correct in saying the amendment won't pass.
A recent poll, conducted by the Kansas City Star and other media outlets, indicated that 33% support the Hancock II amendment while 48% oppose it. The rest are undecided.
Nevertheless, political observers in Missouri said state residents are unpredictable when it comes to tax limitation measures and no one can count on the amendment's defeat until after the election Tuesday.
Jacque Cowherd, the associate executive director for the Missouri School Boards Association, which opposes the amendment, said he is concerned that some of the undecided voters could swing the election.