Fiscal Note - SB 0015 - Private Pension Exemption, Dependency Exemption Deduction to $1,000, Educational Expenses Tax Credit
L.R. NO. 0254-02
BILL NO. SB 15
SUBJECT: Education, Higher; Retirement Systems and Benefits-General;
Taxation and Revenue-General; Taxation and Revenue-Income; Children
and Minors
TYPE: Corrected
DATE: January 24, 1997
# To correct a mathematical error, supercedes fiscal note dated 01/16/97
#FISCAL SUMMARY
ESTIMATED NET EFFECT ON STATE FUNDS
FUND AFFECTED FY 1998 FY 1999 FY 2000
General Revenue ($37,598,949) ($190,026,346) ($190,309,793)
#Total Estimated
Net Effect on All
State Funds* ($37,598,949) ($190,026,346) ($190,309,793)
* Does not include corporation tax credits which would result in unknown
revenue losses.
ESTIMATED NET EFFECT ON FEDERAL FUNDS
FUND AFFECTED FY 1998 FY 1999 FY 2000
None
Total Estimated
Net Effect on All
Federal Funds $0 $0 $0
ESTIMATED NET EFFECT ON LOCAL FUNDS
FUND AFFECTED FY 1998 FY 1999 FY 2000
Local Government $0 $0 $0
FISCAL ANALYSIS
ASSUMPTION
Officials of the Department of Revenue (DOR) assume that exempting private
pensions from state income tax would affect approximately 200,000 taxpayers
that receive a private retirement benefit. The Division of Taxation would
request 3.5 Tax Processing Technician I's to handle the additional pre-edit,
exception processing, telephone calls, error correction and correspondence
that would be created from this legislation.
DOR staff assume that the increase in the personal exemption dependency
amount, from an administrative standpoint could be handled by existing staff.
DOR staff assume the educational expense and scholarship contribution credit,
from an administrative standpoint would require one Tax Processing Technician
I for every 3000 additional returns claiming this credit. However, this
request will be reflected in a future budget as this credit becomes
measurable.
Oversight assumes for purposes of this fiscal note that the Division of
Taxation could handle the volume of work created by this proposal with .5 Tax
Processing Technician I to handle the additional pre-edit and exception
processing and .5 Tax Processing Technician I to handle the error correction
and correspondence generated.
Officials of the Office of Administration (COA) assume that the private
pension exemption portion of the proposal would have an estimated fiscal
impact of $0 in FY 1998, ($70,615,373) in FY 1999 and ($70,791,912) in FY
2000. The estimates are based on State of Missouri Individual Income Tax and
Federal Income Tax data indicating the amount of pensions and number of
returns filed. In calculating the estimate, COA staff assume a marginal tax
rate of 6% and that the number of pensions increases at the same rate
Missouri's over 65 population increases. Population figures are from the
State Demographer. Withholding are assumed not to be adjusted until the
proposal is fully phased in.
Oversight estimates a loss to General Revenue of $26,414,728 for FY 1998 for
this portion of the proposal due to the possibility of reduced withholding
and estimated income tax payments for five months of calendar year 1998.
Office of Administration (COA) officials assume the portion of the proposal
increasing the dependent deduction would have an estimated impact of
approximately ($0) in FY 98, ($49,113,590) in FY 99 and ($49,211,818) in FY
2000 in lost General Revenue funds annually. COA staff assume that taxpayers
will not adjust their withholdings in FY 98 to take advantage of the
increased dependent deduction. COA states the estimate is based on State of
Missouri Individual Income Tax data, data from the Tax Expenditure Report,
and population projections from the State Demographer. COA officials assumed
a marginal income tax rate of 6% in calculating the estimate.
Oversight estimates a loss to General Revenue of $4,595,209 for FY 1998 due
to the possibility of reduced withholding and estimated income tax payments
for five months of calendar year 1998. Oversight assumes 25% of the
taxpayers who are entitled to a dependency deduction would adjust payments,
however, it should be noted that this amount could be less, depending on
taxpayers' awareness of the increase in the dependency deduction and their
desire to adjust tax withholdings or estimated payments.
Oversight has not estimated or included a potential loss to the General
Revenue Fund for the effects of taxpayers' corresponding increase in federal
income taxes which in turn would result in a slight reduction to income taxes
paid to the State of Missouri. Factors which would influence this amount
include the ability of the taxpayer to itemize deductions, the income level
of the taxpayer and the limitation of the federal income tax deduction on the
Missouri return.
Officials of the Coordinating Board for Higher Education (CBH) assume that
237,907 students will be eligible for the educational expenses credit. This
number was reached by the following calculation using the Missouri Higher
Education 1995-1996 Statistical Summary, and the Directory and Statistical
Summary: Proprietary Sector of Missouri Postsecondary Education, 1994-95:
273,379 - total head count enrollment at public and independent institutions,
fall 1995
+20,334 - total head count enrollment in Missouri proprietary institutions,
fall 1994 (latest figure)
293,713
x.81 - percent of Missouri residents in total head count enrollments
237,908 - total Missouri resident enrollment
The definition of Qualified school is broad enough to encompass many other
proprietary and religious institutions in Missouri that are not required to
report enrollment and other statistics to the state. Without such
information, those students cannot be accounted for in this note.
Total enrollment numbers have held fairly constant over the past five to ten
years, therefore the following calculations based on the most recent numbers
are assumed to be applicable for future fiscal years. It is not anticipated
that a $500 credit will significantly effect enrollment levels.
It was also assumed that either students or parents will be able to claim a
credit, provided the actual claimant incurred some educational expenses. The
definition of Educational expenses is broad enough that either the student or
the parent would likely be able to show the necessary expenses. It was
therefore assumed that students will always be the actual claimants since
their adjusted gross incomes will almost always be lower, thus enabling them
to claim more credit.
It was also assumed, based on information from the Missouri Student Grant
database, that the vast majority of students have an adjusted gross income
below $20,000. Since the students, with very low adjusted gross incomes,
will exclusively claim the credit, the cost will be at or about $500 per
student. Additionally, if under Section 4, a corporation were to claim the
credit on behalf of the student, they too would be eligible for the full
$500. Therefore, the total cost of the tax credit itself is estimated to be:
237,908 x $500 = $118,954,000. This does not include additional cost
for the schools for which enrollment numbers are not available.
Regarding sections 3 & 5, the Department of Higher Education knows of no
charitable organization meeting the definition of Qualifying scholarship
charity to which a resident or business may donate in exchange for tax
credits. Therefore, no fiscal impact estimate is available.
The CBH staff would request a Senior Associate, Research Associate and an
Administrative Assistant to implement this proposal. The Senior and Research
Associates would develop an education campaign for the new tax credit
program, respond to citizen requests for information, coordinate the
implementation of the program on the various campuses, and implement new
monitoring and data collection activities for the program. The
administrative assistant FTE would support the new and existing personnel in
grant and scholarship administration.
This proposal does not require CBH to promote the education expense tax
credit, therefore Oversight has not allowed the request for the additional 3
FTE.
#Based on the Missouri Statistics of Income Report: Individual Income Tax
Returns for 1994, Oversight has adjusted the Coordinating Board for Higher
Education estimates down. Oversight has estimated the revenue impact of this
proposal to be a loss of approximately $70,282,795 annually. This estimate
takes into account the number of students per the graduated income level and
the amount of credit allowable at each level. It should be noted that actual
revenue losses could be less depending on the utilization of the new credit.
Factors affecting this include taxpayer awareness of the credit, taxpayers
who may not otherwise be required to file a tax return who choose not to
file, etc.
#Oversight estimates a loss to General Revenue of $6,589,012 for FY 1998 for
this portion of the proposal due to the possibility of reduced withholding
and estimated income tax payments for five months of calendar year 1998.
Oversight assumes 25% of those eligible would adjust payments, however, it
should be noted that this amount could be less, depending on taxpayers'
awareness of the new credit and their desire to adjust tax withholdings or
estimated payments.
Oversight is unable to determine the amount of revenue loss associated with
the corporate tax credit provisions in the proposal. These unknown amounts
could be significant.
This proposal would result in a decrease in Total State Revenues since the
Individual Income tax collections are included in the calculation of Total
State Revenue.
FISCAL IMPACT - State Government FY 1998 FY 1999 FY 2000
(6 Mo.)
Cost to General Revenue Fund
Department of Revenue (DOR)
Personal Service (1 FTE) $0 ($8,661) ($17,756)
Fringe Benefits $0 ($2,471) ($5,066)
Expense and Equipment $0 ($3,456) ($446)
Administrative Cost to DOR $0 ($14,588) ($23,268)
Loss to General Revenue Fund
Retirement Benefits Exemption ($26,414,728) ($70,615,373) ($70,791,912)
Loss to General Revenue Fund
Increased Dependency Deduction ($4,595,209) ($49,113,590) ($49,211,818)
#Loss to General Revenue Fund
Educational Expense Tax Credit ($6,589,012) ($70,282,795) ($70,282,795)
#ESTIMATED NET EFFECT ON
GENERAL REVENUE FUND* ($37,598,949) ($190,026,346) ($190,309,793)
* Estimates for the loss to General Revenue for the allowable credit to
corporations who incur educational expenses or make cash contributions to a
qualifying scholarship charity are unknown. Revenue losses for these credits
are not included in the annual totals.
FISCAL IMPACT - Local Government FY 1998 FY 1999 FY 2000
(6 Mo.)
0 0 0
FISCAL IMPACT - Small Business
Small businesses would be expected to be fiscally impacted to the extent that
they pay educational expenses to a qualified school and may take the
educational expense tax credit.
DESCRIPTION
This proposal incorporates three income tax changes; a private pension
deduction, an increase in the dependency deduction exemption and a credit for
educational expenses or contributions to scholarship charities. PRIVATE
PENSION -- For all tax years beginning after December 31, 1997, this act
establishes an income tax exemption for income obtained from privately funded
annuities, pensions, or other retirement allowances. Retirees would be
allowed to deduct $6,000 if filing an individual return with an adjusted
gross income less than $25,000 or if filing a combined return with an
adjusted gross income less than $32,000. This provision is identical to the
exemption granted to state and federal retirees in 1990 as a result of a U.S.
Supreme Court ruling. DEPENDENCY EXEMPTION -- For all tax years beginning on
or after January 1, 1998, the dependency exemption deduction is increased to
$1,000. Until December 31, 1997, the deduction shall remain at $400.
EDUCATIONAL EXPENSES -- This act provides an income tax credit for
educational expenses and contributions to qualified scholarship charities.
The maximum amount of the credit for educational expenses incurred in
attending a qualified school is $500, with the amount phased out for
taxpayers with a Missouri adjusted gross income in excess of $50,000. If the
credit exceeds the income tax payable, the excess shall be considered an
overpayment of the income tax. Qualified school includes any public or
private post-secondary school located in Missouri. Educational expenses
include tuition, education fees, school supplies or other educational
expenses as defined by the Department of Revenue regulation and which are
incurred in attending a qualified school. For cash contributions to a
qualifying scholarship charity, the credit shall not exceed 50% of the amount
contributed. Corporations with registered agents in the state are authorized
to participate in both of these credits, subject to the same $500 and 50%
limits.
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
Coordinating Board for Higher Education
Missouri Statistics of Income-Published by the Department of Revenue
This Fiscal Note is not an official copy and should not be quoted or cited.