SB 0422 - Fiscal Note

Fiscal Note - SB 0422 - Revises state school aid formula, reduces minimum levy to $1.25, increases income tax and sales tax

COMMITTEE ON LEGISLATIVE RESEARCH

OVERSIGHT DIVISION

FISCAL NOTE

L.R. NO.: 1465-01

BILL NO.: SB 422

SUBJECT: Education, Elementary and Secondary: School Aid Formula

TYPE: Original

DATE: February 23, 1999

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FISCAL SUMMARY

ESTIMATED NET EFFECT ON STATE FUNDS
FUND AFFECTED	FY 2000	FY 2001	FY 2002
General Revenue	($54,685)	($1,504,467,097 TO $1,904,467,097)	($1,224,851,466 TO $1,624,851,466)
School District Trust	$0	$0	$0
Highway	$0	$20,762,250	$43,601,250
Total Estimated Net Effect on All State Funds	($54,685)	($1,483,704,847 TO $1,883,704,847)	($1,181,250,216 TO $1,581,250,216)

ESTIMATED NET EFFECT ON FEDERAL FUNDS
FUND AFFECTED	FY 2000	FY 2001	FY 2002
None	$0	$0	$0
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	$1,916,144,957 TO 2,316,144,957	$1,419,301,197 TO $1,819,301,197

*Excludes unknown costs for salary increases expected to exceed $100,000 annually and county reassessment funds, collectors' commissions and assessment fees.

Numbers within parentheses: ( ) indicate costs or losses

This fiscal note contains 9 pages.

FISCAL ANALYSIS

ASSUMPTION

Officials from the Coordinating Board For Higher Education and Department of Public Safety (Capitol Police and Division of Fire Safety) assume the proposal would result in no fiscal impact to the agencies.

Officials from the State Tax Commission assume the proposal would result in no fiscal impact to the agency. They state that although the minimum operating rate would be lowered from $2.75 to $1.25, there would be no mandate to lower taxes.

Officials from the Secretary of State's Office (SOS) assume statewide newspaper publication of the statutory referendum would cost approximately $1,330 per inch x 3 printings = $3,990 per inch. The SOS estimates the total number of inches for this referendum would be 100 inches, which includes title header and certification paragraph. $3,990 x 100 inches = $399,000.

Officials from the Department of Elementary and Secondary Education (DESE) assume increasing the GTB on Lines 1 and 14 of the foundation formula; reducing the local tax effort on Lines 1 and 2 of the foundation formula; and eliminating the deduction for the sales tax would increase the amount needed to fund the formula by approximately $1.6 to $2.0 billion. However, with the increase in sales and income taxes, the state revenues could increase by that amount.

Using 1997-98 salary data (best available), in 1997-98 the additional approximate cost for the raised minimum salary levels of $20,000 and $28,000 was approximately $2.3 million. The additional cost for the $31,000 level has not been determined; however, it is expected to exceed $100,000 in impact. The cost for FY 2001 or following years cannot be determined. Districts annually set salary schedules. The cost would be impacted by the increases local boards of education make in salary schedules as well as by the number of teachers employed at these levels.

Technology Impact - revisions to the programming of the formula would be needed but should not be significant. Some programming would be needed for the minimum salary requirements. This impact is estimated to be $8,000 beginning FY 2000, with maintenance costs estimated to be $2,000 for FY 2001 and FY 2002.

Summary of DESE Impacts:

a) Foundation Formula changes: $1.6 - $2.0 billion additional required to fully fund the formula; applies to the State Schools Monies Fund. Local school districts would also experience this as an increase in local assistance.

ASSUMPTION (continued)

b) Income and sales tax increases: $1.6 - $2.0 billion additional revenue assumed; applies to General Revenue Fund; DESE defers to Dept. of Revenue on the final numbers used for these impact estimates.

c) Salary increases: FY 2000 $2.3 million - $2.4 million; applies to local public school districts. Impact for FY 2001+ is expected to be above $100,000 in amount.

d) IT impact on DESE General Revenue Fund: $8,000 software development and maintenance in FY 2000; $2,000 for FY 2001 FY 2002 for maintenance. The Oversight Division assumes DESE could absorb these additional costs.

The Oversight Division has included DESE's estimated costs beginning in FY 2001, since the proposal would not be voted on until the November, 2000 election.

Officials from the from Office of Administration-Budget and Planning (COA-B&P) assume that since the tax increases would have to be approved by the voters, they would not count as Total State Revenues (TSR). However, the provision in section 166.131 that has fines go to the State School Moneys Fund would increase TSR. They do not know how much this would be but it could approximate $20 million annually.

COA-B&P officials assume the increase in the sales tax rate by 1% would take effect 10-1-99, but there would be a one month lag for the increased collections to show up in state revenue. Therefore, only eight months of revenue would be realized in FY 2000. Also according to the constitution, half of motor vehicle sales goes to the Motor Fuel Tax Fund.

COA-B&P officials assume the proposal would increase the top rate of individual income tax from 6% to 6.5% and would increase the starting point of the top bracket to $10,000. The revenue increase from these changes would be $230.7 million in FY 2002. The starting date for this change would be 1-1-02 and would not affect revenue collections until FY 2002. The estimate is based on data from Budget and Planning's individual income tax simulator and the Consensus Revenue Estimate.

COA-B&P officials assume the proposal would increase the corporate income tax rate from 6.25% to 6.75%. The revenue increase from this change would be $29.8 million in FY 2002. The starting date for this change would be 1-1-02 and would not affect revenue collections until FY 2002. The estimate is based on data from Budget and Planning's corporate income tax simulator and the Consensus Revenue Estimate.

ASSUMPTION (continued)

Officials from the Department of Revenue (DOR) assume since the tax increase would be voted on by voters at the November, 2000, election, the law could become effective January 1, 2001. DOR would require overtime hours in the Individual Income ($15,606), Corporate Income ($4,524) and Sales Tax ($18,096) systems. State Data Center charges would be $16,459. Because of an implementation date that would follow closely behind the election date, DOR anticipates they would have to start systems changes before the election date.

DOR officials used calendar year figures to project FY 2001 and 2002 collections which would result from the tax increases:

FY 2001 Corporate Tax $31,197,143

Individual Tax 327,572,754

Sales Tax 618,448,413

TOTAL INCREASE 977,218,310

FY 2002 Corporate Tax $31,197,143

Individual Tax 343,951,391

Sales Tax 649,370,833

TOTAL INCREASE 1,024,519,367

The Oversight Division has used revenue estimates from the Department of Revenue in the fiscal impact. Oversight assumes revenue collections for the individual and corporate tax increases would begin in FY 2001 since the taxes would become effective January 1, 2001. Oversight has only included 25% of DOR's revenue estimate for FY 2001 for individual taxes and 45% of DOR's revenue estimate for FY 2001 for corporate taxes, assuming collection of withholding and estimated tax payments. Oversight also assumes that the sales tax would not be effective until after the November, 2000, election and has included only half of DOR's sales tax increase estimate in FY 2001. Therefore, for FY 2001, Oversight included corporate tax increases of $14,038,714 (45% x $31,197,143); individual tax increases of $81,893,189 (25% x $327,572,754); and sales tax increases of $309,224,207 (50% x $618,448,413).

Officials from the Missouri Department of Transportation (MoDOT) assume the sales tax increase would result in the following increase in motor vehicle sales tax:

FY 2000 $52,729,000

FY 2001 55,366,000

FY 2002 58,135,000

These amounts would be split 75% to the Highway Fund, 15% to cities and 10% to counties.

ASSUMPTION (continued)

The Oversight Division has calculated the potential fiscal impact of a reduction in operating levies of $1.50 to school districts. Oversight assumes this would be approximately $844,603,386 based on total Missouri assessed valuations for 1998 of $56,306,892,400. Oversight assumes this would not take effect until FY 2002. Unknown losses to counties for reassessment funds, collectors' commissions and assessment fees have also been included in the local government fiscal impact.

The proposal would increase total state revenues since fines would go to the State School Monies Fund.

FISCAL IMPACT - State Government	FY 2000	FY 2001	FY 2002
GENERAL REVENUE FUND
Income-General Revenue Fund
Increase in Individual Tax Rate	$0	$81,893,189	$343,951,391
Increase in Corporate Tax Rate	0	14,038,714	31,197,143
Sales Tax (additional one cent)	0	309,224,207	649,370,833
Total Income-General Revenue Fund	$0	$405,156,110	$1,024,519,367
Cost-General Revenue Fund
Transfer to School District Trust Fund	$0	($309,224,207)	($649,370,833)
Cost-Secretary of State's Office
Advertisement Costs	$0	($399,000)	$0
Cost-Department of Revenue
Overtime	($38,226)	$0	$0
State Data Center Charges	(16,459)	0	0
Total Cost-DOR	($54,685)	$0	$0
Cost-DESE
Foundation Formula	$0	($1,600,000,000	($1,600,000,000)
		TO	TO
		$2,000,000,000)	$2,000,000,000)
ESTIMATED NET EFFECT ON
GENERAL REVENUE FUND	(54,685)$	($1,504,467,097	($1,224,851,466
		TO	TO
		$1,904,467,097)	$1,624,851,466)
FISCAL IMPACT - State Government	FY 1999	FY 2000	FY 2001
(Continued)	(10 Mo.)
SCHOOL DISTRICT TRUST FUND
Income-Department of Elementary and
Secondary Education
Transfer from General Revenue Fund	$0	$309,224,207	$649,370,833
Cost-Department of Elementary and
Secondary Education
Foundation Formula (additional sales tax)	$0	($309,224,207)	($649,370,833)
ESTIMATED NET EFFECT ON
SCHOOL DISTRICT TRUST FUND	$0	$0	$0
HIGHWAY FUND
Income-Highway Fund
Sales Tax and Highway Use Tax
(75% of additional one cent)	$0	$20,762,250	$43,601,250
FISCAL IMPACT - Local Government	FY 2000	FY 2001	FY 2002
	(10 Mo.)
Income-Cities
Sales Tax (15%)	$0	$4,152,450	$8,720,250
Income-Counties
Sales Tax (10%)	$0	$2,768,300	$5,813,500
Income-School Districts
Increase in Foundation Formula:
Additional Sales Tax	$0	$309,224,207	$649,370,833
Formula Changes	0	1,600,000,000	1,600,000,000
		to	to
		2,000,000,000	2,000,000,000
FISCAL IMPACT - Local Government	FY 1999	FY 2000	FY 2001
(Continued)	(10 Mo.)
Cost-School Districts
Salary Increases	$0	(GREATER	(GREATER
		THAN	THAN$100,000)$100,000)
Loss-School Districts
Reduction in taxes for school purposes	$0	$0	($844,603,386)
Loss-Counties
Reassessment funds, collectors' commissions and
assessment fees	$0	$0	(Unknown)
ESTIMATED NET EFFECT ON
LOCAL GOVERNMENT*	$0	$1,916,144,957	$1,419,301,197
		TO	TO
		$2,316,144,957	$1,819,301,197
*Excludes unknown costs for salary increases expected to exceed $100,000 annually and county reassessment funds, collectors' commissions and assessment fees.
FISCAL IMPACT - Small Business
Small businesses would be affected as a result of this proposal. They would pay higher sales taxes on taxable purchases and higher corporate income taxes.

DESCRIPTION

The proposal would reduce the income tax rate for Missouri taxable income of every resident over $9,000 from 6% to 5.5%. The income tax rate would increase from 6% to 6.5% for taxable income over $10,000. The tax rates would apply on and after January 1, 2001.

For all tax years beginning on or after January 1, 2001, the tax imposed on corporations would equal 6.75% of taxable income.

The proposal would raise the state portion of the sales tax from four percent to five percent of the purchase price. The amount going to the School District Trust Fund would be raised from one cent on the dollar to two cents on the dollar.

DESCRIPTION (Continued)

The proposal would delete language which states that the corporate organization of school districts classified as unaccredited for two successive school terms would lapse.

In the definition of "operating levy for school purposes", the maximum levy would be $1.25 per one hundred dollars assessed valuation ($4.60 under current law).

The deduction in the school aid formula for the free and reduced lunch eligible pupil count would increase from .20 to .25.

The minimum teacher's salary would be $20,000. For full-time teachers with at least a master's degree and at least ten years teaching experience, the minimum salary would be $28,000. For any full-time teacher with at least 20 years teaching experience and either a master's degree or a continuous professional certificate, the minimum salary would be $31,000.

On and for tax years beginning after January 1, 2001, a school district would levy an operating levy for school purposes not in excess of the greater of $1.25 per one hundred dollars assessed valuation or the district's operating levy for school purposes for the tax year ending on December 31, 2000, minus $1.50 per one hundred dollars assessed valuation unless a majority of district voters approve a higher levy. School districts seeking voter approval would conduct a public hearing on the proposal prior to placing the issue on the ballot.

The clear proceeds of all penalties and fines collected for any breach of penal laws would be transferred to the State School Monies Fund and distributed through the state aid formula. Under current law they are distributed by the county in the same proportion as the September membership of the school district is to the membership of all county districts.

The proposal would be submitted to the voters of the state for approval at a special election in November, 2000.

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 Elementary and Secondary Education

State Tax Commission

Office of Administration (Budget and Planning)

Department of Revenue

Secretary of State's Office

Coordinating Board For Higher Education

Department of Public Safety

NOT RESPONDING: State Auditor's Office

Jeanne Jarrett, CPA

Director

February 23, 1999