SB 0080 - Fiscal Note

Fiscal Note - SB 0080 - Exempts from state income tax social security benefits included in federal gross income

COMMITTEE ON LEGISLATIVE RESEARCH

OVERSIGHT DIVISION

FISCAL NOTE

L.R. NO.: 0250-01

BILL NO.: SB 80

SUBJECT: Taxation and Revenue - Income; Retirement Systems and Benefits - General

TYPE: Original

DATE: March 4, 1999

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FISCAL SUMMARY

ESTIMATED NET EFFECT ON STATE FUNDS
FUND AFFECTED	FY 2000	FY 2001	FY 2002
General Revenue	($23,056,389)	($97,578,075)	($103,680,964)
Total Estimated Net Effect on All State Funds	($23,056,389)	($97,578,075)	($103,680,964)

ESTIMATED NET EFFECT ON FEDERAL FUNDS
FUND AFFECTED	FY 2000	FY 2001	FY 2002
None
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	$0	$0

Numbers within parentheses: ( ) indicate costs or losses

This fiscal note contains 5 pages.

FISCAL ANALYSIS

ASSUMPTION

Officials of the Department of Revenue (DOR) state the proposal would allow taxpayers to subtract from their federal adjusted gross income any social security benefits included in their federal gross income.

ADMINISTRATIVE IMPACT:

The IRS in its Spring 1998 Statistics of Income Bulletin reports that there were 149,279 federal returns filed by Missouri taxpayers reporting over $1 billion in social security benefits. The Division of Taxation and Revenue does not anticipate a significant number of errors resulting from the proposal. However, for every 20,000 additional errors generated from this deduction, one Tax Processing Technician I would be needed for six months (at a cost of $8,340) and would be requested through the budget process.

This proposal would require modifications to the income tax system. The Division of Taxation and Collections estimates these modifications, including programming changes, would require 822 hours of overtime at a cost of $20,808. 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 $5,560 would be requested.

Officials of the Office of Administration (COA) state the Spring 1998 Statistics of Income report that Social Security benefits in Missouri adjusted gross income for 1996 were $1,004,281,000. COA states this is the first year that Social Security benefits have been reported by state. COA also states that national Social Security benefits have been growing at about 18% annually since 1994. A 10% growth rate is used for this estimate. A 6% marginal tax rate is then used to determine the amount of individual income tax revenue lost to the state. COA assumes that taxpayers would not adjust their withholdings in FY 1999 to take advantage of this proposal, causing the revenue impact not to be felt until FY 2000.

Oversight estimates a loss to the General Revenue Fund of $22,055,517 for FY 2000 due to the possibility of reduced withholding and estimated income tax payments for five months of calendar year 2000. Oversight assumes 25% of Missouri taxpayers would adjust payments, however it should be noted that this amount could be less depending on taxpayer's awareness of the deductibility of Social Security benefits in determining state income tax and their desire to adjust withholdings or estimated payments.

ASSUMPTION (continued)

DOR also states the proposal would exempt a military annuity, pension, or retirement allowance from state taxation.

ADMINISTRATIVE IMPACT:

DOR states the number of taxpayers eligible for this tax credit is unknown at this time. The Division of Taxation would need one temporary tax season employee for every 250,000 returns claiming the deduction and one Tax Processing Technician I for every 20,000 individual income tax errors generated from this proposal.

The proposal would require modifications to the income tax system. The Division of Taxation and Collections estimates these modifications, including programming changes, would require 821 hours of overtime at a cost of $20,808. 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 $5,348 would be requested.

COA also assumes that the proposal would have an estimated impact of approximately ($0) in FY 2000, ($34,651,881) in FY 2001 and ($35,691,438) in FY 2002. COA staff assume that taxpayers would not adjust their withholdings in FY99 to take advantage of the exemption of military retirement benefits. The estimate is based on 1996 retired military pay found in Table 548 of the 1997 Statistical Abstract of the United States. The 1996 figure is grown at 3% annually. Missouri is assumed to be 1.9% of the national total. In calculating the estimate, COA staff assume a marginal tax rate of 6%.

The Office of Administration's estimates include the federal retirement benefits which are currently exempt from Missouri income tax. Oversight assumes this proposal would have an estimated impact of approximately 27% of the estimate made by the COA staff. This estimate is based on 1995 military service retirement system benefits ($28 billion) divided by the number of military retirement system participants found in Table 589 of the 1997 Statistical Abstract of the United States (3,387,000) for an average pension of $8,266. Since the first $6,000 of this pension is already exempt, only the additional $2,266 would be the impact of this proposal. Assuming that the $8,266 represents the average pension for COA's estimate Oversight has

shown only 27% of COA's estimate (2,266 /8,266 = 27%).

Oversight has not included benefits received by federal retirees from Thrift Savings Plan (a defined contribution plan).

Oversight estimates a loss to General Revenue of $946,198 for FY 2000 due to the possibility of reduced withholding and estimated income tax payments for five months of calendar year 2000.

ASSUMPTION (continued)

Oversight assumes 25% of the retired military exempt would adjust payments, however, it should be noted that this amount could be less, depending on taxpayers' awareness of the exempt status and their desire to adjust tax withholdings or estimated payments.

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

FISCAL IMPACT - State Government	FY 2000	FY 2001	FY 2002
	(6 Mo.)
GENERAL REVENUE FUND
Loss - General Revenue Fund
Deduction of Social Security benefits	($22,055,517)	($88,222,069)	($97,044,276)
Military retirement deduction*	($946,198)	($9,356,007)	($9,636,688)
Loss - General Revenue Fund	($23,001,715)	($97,578,075)	($103,680,964)
Cost - Department of Revenue
Reprogramming costs	($54,674)	$0	$0
ESTIMATED NET EFFECT ON
GENERAL REVENUE FUND*	($23,056,389)	($97,578,075)	($103,680,964)
*These estimates do not reflect benefits received from Thrift Savings Plan (a defined contribution plan).
FISCAL IMPACT - Local Government	FY 2000	FY 2001	FY 2002
	(6 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

Under current federal law, a taxpayer's social security benefits are exempt from taxation unless the taxpayer's modified adjusted gross income plus one-half of the social security benefits received exceeds a base amount. This proposal would authorize the subtraction from a taxpayer's

federal adjusted gross income of any amounts of social security benefits when calculating DESCRIPTION (continued)

Missouri adjusted gross income.

The proposal has an effective date of January 1, 2000, and applies to all taxable years beginning

on or after December 31, 1999.

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

Division of Budget and Planning

Jeanne Jarrett, CPA

Director

March 4, 1999