SB 0283 - Fiscal Note

Fiscal Note - SB 0283 - Reduces federal income tax deduction for corporations and individuals; revenue to replace local sales tax on food

COMMITTEE ON LEGISLATIVE RESEARCH

OVERSIGHT DIVISION

FISCAL NOTE

L.R. NO.: 1223-01

BILL NO.: SB 283

SUBJECT: Cities, Towns and Village; Corporations; Taxation and Revenue-General-Income

TYPE: Original

DATE: February 5, 1999

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FISCAL SUMMARY

ESTIMATED NET EFFECT ON STATE FUNDS
FUND AFFECTED	FY 2000	FY 2001	FY 2002
Local Revenue Replacement	$0	$0	$0
General Revenue	$0	($727,600)	$1,032,795
Total Estimated Net Effect on All State Funds	$0	($727,600)	$1,032,795

ESTIMATED NET EFFECT ON FEDERAL FUNDS
FUND AFFECTED	FY 2000	FY 2001	FY 2002
Total Estimated Net Effect on All Federal Funds	$0	$0	$0

ESTIMATED NET EFFECT ON LOCAL FUNDS
FUND AFFECTED	FY 2000	FY 2001	FY 2002
Local Government	$0	($50,875,000)	($71,460,784)

Numbers within parentheses: ( ) indicate costs or losses

This fiscal note contains 5 pages.

FISCAL ANALYSIS

ASSUMPTION

Officials of the Department of Revenue (DOR) state this legislation eliminates local sales tax on the retail sales of food. Revenues lost by the counties and political subdivisions are to be replaced by lowering the amounts of federal income tax that is deductible by Missouri income taxpayers and transferring those new created funds to the cities and counties.

ADMINISTRATIVE IMPACT:

The Division of Taxation and Collections would need one Tax Processing Technician I to assist in the distribution process and to continually work with the cities and counties. In addition, the Division of Taxation and Collections would need to send notification letters to approximately 20,000 accounts at a cost of $7,000.

This legislation would require modifications to three mainframe tax systems. The Division of Taxation and Collections estimate these modifications, including programming changes, would require 260 hours of overtime at a cost of $5,202 for the corporate tax system, 4,541 hours of overtime at a cost of $104,042 for the sales tax system and 952 hours of overtime at a cost of $20,808 for the income tax system. Modifications to the income tax return and schedules would be completed with existing resources. State Data Center charges would increase due to the additional storage and fields to be captured. Funding in the amount of $37,406 would be requested.

Officials of the Office of Administration (COA) state taking the local sales tax off of food, assuming a 1.5% average rate, would cost $89.7 million in FY2000, $122.1 million in FY2001 and $124.5 million in FY2002. It is assumed that the sales tax cut will take affect on 10/1/99, therefore it is only in effect for 75% of FY2000. Decreasing the deductibility of federal income tax to $4,000 for single and $8,000 for joint on the individual income tax would increase collection by $0 in FY2000, $43.6 million in FY2001 and $46.2 million in FY2002. COA staff assume that taxpayers would not adjust their withholdings in FY2000 to account for this tax increase. Decreasing the deductibility of federal income tax to 40% on the corporate income tax would increase collection by $0 in FY2000, $7.8 million in FY2001 and $7.9 million in FY2002. These tax increases do not cover the entire amount that needs to be returned to the locals, therefore it is assumed that the rest would be replaced by General Revenue, $89.7 million in FY2000, $70.7 million in FY2001 and $70.4 million in FY2002. The cut of sales tax on food would take effect in FY2000, while the tax increases would not start to generate revenue until FY2001.

ASSUMPTION (continued)

Oversight assumes this proposal would take effect in FY2001.

Oversight has incorporated the Department of Revenue's 2% administrative fee into the revenue impact estimate made by the Office of Administration.

Advertisement costs for the proposal would be $3,990 per newspaper column inch for three publication of the text of the proposal, the introduction, title, fiscal note summary, and affidavit. The proposal would be on the ballot for the November 2000 general election.

This proposal would result in an increase in Total State Revenues.

FISCAL IMPACT - State Government	FY 2000	FY 2001	FY 2002
LOCAL REVENUE REPLACEMENT FUND
Income to Local Revenue Replacement Fund
Decreasing deductibility of Federal
Individual Income tax	$0	$0	$45,294,118
Decreasing deductibility of Federal
Corporate Income tax to 40%	$0	$0	$7,745,098
Loss to Local Revenue Replacement Fund
Transfer to Local Political Subdivisions
For local sales tax exemption on food	$0	$0	($53,039,216)
ESTIMATED NET EFFECT ON
LOCAL REVENUE REPLACEMENT FUND	$0	$0	$0
GENERAL REVENUE FUND
Income to General Revenue Fund
2% Administrative Fee	$0	$0	$1,060,784
FISCAL IMPACT - State Government	FY 2000	FY 2001	FY 2002
(Continued)
Cost to General Revenue Fund
Department of Revenue (DOR)
Personal Service(1 FTE plus O.T.)	$0	($150,741)	($21,206)
Fringe Benefits	$0	($45,056)	($6,338)
Expense and Equipment	$0	($51,803)	($445)
Total Administrative Costs to DOR	$0	($247,600)	($27,989)
Cost to General Revenue Fund
Secretary of State
Newspaper Advertisements	$0	($480,000)	$0
ESTIMATED NET EFFECT ON
GENERAL REVENUE FUNDS	$0	($727,600)	$1,032,795
FISCAL IMPACT - Local Government	FY 2000	FY 2001	FY 2002
Income to Political Subdivisions
Transfer from Local Revenue
Replacement Fund	$0	$0	$53,039,216
Loss to Political Subdivisions
Sales tax exemption on Food	$0	($50,875,000)	($124,500,000)
ESTIMATED NET EFFECT
ON LOCAL GOVERNMENT	$0	($50,875,000)	($71,460,784)
FISCAL IMPACT - Small Business
Small businesses that sell food and qualify under the food stamp program would incur some administrative costs due to additional record keeping and filing requirements.

DESCRIPTION

This act exempts food from local sales taxes imposed by political subdivisions. The bill also reduces the limits on deductibility of federal income tax for individuals and corporations: the current limit of $5,000 for single taxpayers is reduced to $4,000 and the $10,000 limit on married taxpayers filing a combined return is reduced to $8,000. The current limit of 50% on deductibility of federal income tax by corporations is reduced to 40%. The revenue increase from the lowered limits on federal income tax deductibility is used to fund the "Local Revenue Replacement Fund" which the act creates. The money in the fund is then distributed by the director of revenue to the local political subdivisions to replace the revenue lost as a result of the exemption of food. The bill has a referendum clause.

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

Office of Secretary of State

Jeanne Jarrett, CPA

Director

February 5, 1999