SB 0491 - Fiscal Note

Fiscal Note - SB 0491 - Increases dependency and certain other income tax deductions

COMMITTEE ON LEGISLATIVE RESEARCH

OVERSIGHT DIVISION

FISCAL NOTE

L.R. NO. 2146-02

BILL NO. SB 491

SUBJECT: Taxation and Revenue-General; Taxation and Revenue-Income

TYPE: Revised

DATE: February 19, 1998

#Revised by vote of the Oversight Subcommittee on February 19, 1997

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#FISCAL SUMMARY

ESTIMATED NET EFFECT ON STATE FUNDS
FUND AFFECTED	FY 1999	FY 2000	FY 2001
General Revenue	$0	#($200,000,000)	#($200,000,000)
#Total Estimated Net Effect on All State Funds	$0	#($200,000,000)	#($200,000,000)

ESTIMATED NET EFFECT ON FEDERAL FUNDS
FUND AFFECTED	FY 1999	FY 2000	FY 2001
None
Total Estimated Net Effect on All Federal Funds	$0	$0	$0

ESTIMATED NET EFFECT ON LOCAL FUNDS
FUND AFFECTED	FY 1999	FY 2000	FY 2001
Local Government	$0	$0	$0

Numbers within parentheses: ( ) indicate costs or losses

This fiscal note contains 4 pages.

#FISCAL ANALYSIS

ASSUMPTION

Officials of the Department of Revenue (DOR) state this proposal would allow passive investment income to be added to the pension exemption under section 143.124, RSMo, the dependency exemption is increased from $400 to $1,200, non-itemizers are allowed to deduct FICA, railroad retirement or self-employment taxes. This legislation would require modifications to the individual income tax system, forms and schedules. These modifications and form/schedule revisions would be completed by existing staff and resources.

Officials of the Office of Administration (COA) state this proposal extends private pension exemption to passive investments, increases dependency deduction to $1,200 and allows non-itemizers to deduct their FICA, railroad retirement or self-employment taxes.

Passive Investment Portion

According to the Spring 1997 Statistics of Income Table 2 interest, dividends, and net capital gains totaled $1,705,188,000 for Missouri in 1995. Demographic data indicates that 13.8% of Missouri's population is over 65. Therefore, it is assumed that 13.8% of the passive investment in Missouri is from taxpayers 65 and over. It is also assumed that 50% of these taxpayers would already have pension or other income that would max out their pension deduction. Annual growth of 5% was assumed. COA staff assume that taxpayers would not adjust their withholdings in FY99 to take advantage of this deduction. The revenue reduction is $0 in FY99, $9,009,882 in FY2000 and $9,460,376 in FY2001.

Dependent Exemption

Officials of the Office of Administration have assumed that this portion of the proposal would have an estimated revenue reduction of approximately $0 in FY99, $65,615,757 in FY2000 and $65,746,988 in FY2001. COA staff assume that taxpayers would not adjust their withholdings in FY99 to take advantage of the increased dependent deduction. The estimate is based on State of Missouri Individual Income Tax data, data from Tax Expenditure Report, and population projections from the State Demographer.

FICA Deduction for non-itemizers

According to Federal Receipts by Source from table 516 in the 1997 Statistical Abstract receipts for FICA taxes are $500,467,000,000 in 1997. It is assumed that Missouri's share is 1.9%. A 4.5% average tax rate is assumed to derive the amount of Missouri tax revenue from FICA taxes. From this amount, the amount already being deducted by itemizers is subtracted. The amount deducted by itemizers is found in the 1997 Tax Expenditure Report. COA staff assume that taxpayers would not adjust their withholdings in FY99 to take advantage of this deduction. The

ASSUMPTION (continued)

revenue reduction is $0 in FY99, $315,292,660 in FY2000 and $333,791,772 in FY2001.

#Oversight received additional information from Dr. Ed Robb with the University of Missouri Research Center indicating that for tax year 1996 there were $5.5 billion in FICA taxes paid by Missouri taxpayers. $2.9 billion FICA taxes were claimed by Missouri taxpayers in 1996. This left $2.6 billion unclaimed. Dr. Robb stated using a 4.2% average tax rate would yield a revenue loss of approximately $110 million. For tax year 1999 a revenue loss of approximately $127,000,000 would be reflected. A 5% growth rate was assumed.

#Based on further review and better data provided to the Research Center, officials of the Office of Administration would concur with the estimate provided by Dr. Robb.

#By vote of the Oversight Subcommittee on February 19, 1998, the overall net effect of this proposal has been adjusted to ($200,000,000) annually.

This proposal would result in a decrease in Total State Revenues.

FISCAL IMPACT - State Government	FY 1999	FY 2000	FY 2001
	(10 Mo.)
# Loss to General Revenue Fund
Passive Investment Exemption	0	($9,009,882)	($9,460,376)
Dependent Exemption Increase	0	($65,615,757)	($65,746,988)
FICA Deduction for non-itemizers	0	($125,374,361)	($124,792,636)
Total Loss to General Revenue Fund	$0	($200,000,000)	($200,000,000)
# NET EFFECT TO GENERAL REVENUE FUND	$0	($200,000,000)	($200,000,000)
FISCAL IMPACT - Local Government	FY 1999	FY 2000	FY 2001
	(10 Mo.)
	0	0	0

FISCAL IMPACT - Small Business

No direct fiscal impact to small businesses would be expected as a result of this proposal.

DESCRIPTION

Current law phases in the exemption from state income tax of private pension allowances. The maximum amount is $6,000 for the year 2002 and thereafter. This act includes within the phased-in exemption passive investment income received from any person who is 65 or

older and caps the exemption for all retirement benefits at $6,000.

The act also extends the current FICA tax deduction, currently available only to those taxpayers

who itemize deductions, to all income taxpayers.

The dependency exemption deduction is increased from the current $400 to $1,200.

This legislation is not federally mandated, would not duplicate any other program and would not require additional capital improvements or rental space.

SOURCES OF INFORMATION

Department of Revenue

Office of Administration

Jeanne Jarrett, CPA

Director

February 19, 1998