CHICAGO – With his veto of a tax cut package sustained, Missouri Gov. Jay Nixon released $215 million of $400 million in budgeted funds he had withheld, but said he won’t free up the remaining dollars due to other fiscal concerns including the impact of the state’s loss in tobacco master settlement arbitration.

Nixon in June announced he was withholding funds from the fiscal 2014 budget as the legislature prepared to attempt to override his veto of a tax cut package during its annual veto session. The package was estimated to shave $700 million to $800 million off state revenues annually and could have resulted in a total $1.2 billion loss of revenues if federal legislation involving internet sales taxes passed.

The Republican majority in the Legislature failed Wednesday to override the Democratic governor’s veto after which Nixon restored $215.2 million of funding earmarked for education, mental health, and other budgeted priorities.

“My administration will continue to monitor the numbers carefully to ensure we protect our perfect AAA credit rating and keep the state on a fiscally sustainable path,” Nixon said.

Under the vetoed legislation, the top tax rate for individuals would have dropped to 5.5% from 6% over the next 10 years and corporate income tax rates would be cut almost by one half to 3.25% from 6.25%. The changes hinged on annual growth in state revenues meeting a minimum threshold of $100 million. The tax on business income reported on individual tax returns would have been reduced by half over five years. The state has a $25 billion fiscal 2014 budget.

Standard & Poor’s, which had warned that the legislation could have pressured state finances especially if the federal legislation was also approved, on Thursday affirmed the state’s AAA rating. Analysts also noted that the fiscal threat remains. “The bill’s sponsor indicated that a similar bill may be introduced in January 2014. Standard & Poor’s will continue to monitor Missouri’s legislation and its potential impact on credit quality,” analysts wrote.

About $185 million of the $400 million Nixon withheld remains restricted, including $175 million that earmarked for capital improvement projects. The administration said it needed to assess the impact of several fiscal issues before freeing up all the funds. The budget assumed savings from a proposed tax credit overhaul and new revenue from a tax amnesty program. Neither passed.

Nixon has also asked budget director Linda Luebbering to determine the impact on state coffers of the state’s tobacco arbitration loss. Missouri Attorney General Chris Koster has not yet said how much of the $150 million payment made by tobacco companies to the state in 2003 must be returned due to the loss.

The state was among six that lost their arbitration case for failing to prove that they diligently enforced terms of the 1998 master settlement agreement between most states and the major tobacco companies aimed at protecting the companies from market share losses to non-participating manufacturers.  Nine states won their cases. The funds will be reduced from the payment tobacco companies are due to make to the state next April. The state faces further arbitration over payments between 2004 and 2012.

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