COMMITTEE ON LEGISLATIVE RESEARCH

OVERSIGHT DIVISION

FISCAL NOTE

L.R. No.: 1169-01

Bill No.: HB 517

Subject: Elderly; Property, Real and Personal; State Tax Commission; Taxation and Revenue - General; Taxation and Revenue - Property

Type: Original

Date: February 25, 2003

FISCAL SUMMARY

*Expected to exceed $100,000 per year. Subject to appropriation; does not include possible costs to fully fund Foundation Formula.

* Expected to exceed $100,000 per year.

Numbers within parentheses: ( ) indicate costs or losses.

This fiscal note contains 12 pages.

* Expected to exceed $100,000 per year.

ASSUMPTION

Officials from the Office of the Secretary of State assume this bill would create the Missouri Homestead Preservation Act. The State Tax Commission would promulgate rules to enact this legislation. Based on experience with other divisions, the rules, regulations, and forms issued by the State Tax Commission could require as many as 8 pages in the Code of State Regulations and half again as many pages in the Missouri Register because cost statements, fiscal notes and the like are not repeated in Code. These costs are estimated. The estimated cost of a page in the Register is $23 and the estimated cost of a page in the Code is $27. The actual cost could be more or less than the numbers given. The impact of the legislation in future years is unknown and depends upon the frequency and length of rules filed, amended, rescinded or withdrawn. ((8x$27)+(12x$23)=$492)

ASSUMPTION (continued)

Oversight assumes the SOS could absorb the costs of printing and distributing regulations related to this proposal. If multiple bills pass which require the printing and distribution of regulations at substantial costs, the SOS could request funding through the appropriation process. Any decisions to raise fees to defray costs would likely be made in subsequent fiscal years.

Officials from the Cole County Assessor's Office assume there will be no revenues or savings to the Cole County Assessor's office from this bill. Officials from the Cole County Assessor's Office also assume the office will incur one time programming change costs estimated at $2000 for the year 2004.

The Assessor's office will have to maintain a separate accounting of homestead properties and this will require additional personnel time; the Cole County Assessor's office is understaffed and no additional requirements can be placed on the existing staff without sacrificing some other function of the office. It is estimated a quarter time person would be needed to maintain and implement this program on an ongoing basis at a yearly expense of $6000 per year, starting in 2004.

Furthermore, there is vague language concerning the responsibility of the counties as it relates to supplying the State Tax Commission and/or the State Auditor with information concerning the process of collecting, reporting and submitting data stating revenue losses by the taxing jurisdictions. These reporting requirements would require work on the part of the Assessor, the Collector, and the Clerk, at a minimum. There is no funding in the bill for the extra duties that may be assigned and, with no other information available, a $12,000 per year estimate for this item seems appropriate.

It is estimated that persons over 65 make up 15% of the total county population. Of those who are of ownership age (18 years +), persons over 65 make up 20% of the potential owners in the county. It is assumed that a greater percentage of senior citizens own property than those under 25 years of age, and overall it is estimated that owners over 65 own 35% of the residential property in Cole County. It is further, and lastly, estimated that 85% of those over age 65 fall within the income limits set by this bill (less than $75,000 annually). Estimates are on the high end so as not to underestimate.

There is no loss in 2004 as new construction and improvements would still be added pursuant to existing law.

For 2005, assuming an 8% appreciation in property value for a typical reassessment cycle (4% per year), the loss to the taxing jurisdictions caused by this bill is approximately $612,000.

ASSUMPTION (continued)

Officials from the Cole County Assessor's Office assume there will be no loss in 2006 as new construction and improvements would still be added pursuant to existing law.

It is estimated that no losses would be made up to political subdivisions in the year 2005 due to the provisions under No. 6, considering that the number of sales of homestead properties would be so minimal at that point in time that any substantial effect would be unlikely. Item 6 does not guarantee that political subdivisions would ever be reimbursed for losses listed above, only granting the General Assembly the option of appropriating monies. Also, under No. 6, it would be nearly impossible to estimate how many sales of homestead properties would occur in any given year.

The Assessor's work load would not change as all properties under this bill still need to be inspected during physical property review for additions, alterations, and/or deletions, including non-reassessment years. The work load of the Assessor would actually increase due to administrative cost of implementing this program in the Assessor's office.

The Assessor does not have enough information to determine the impact of Item 3 on page 1 concerning the MO Property Tax Credit program as it pertains to Cole County. Logically, the MO Property Tax Credit program is funded with such low income limits, and does not require property ownership, that those who utilize the program now would probably continue to do so in the future. Likewise, it seems logical that those not now utilizing the Property Tax Credit program would utilize the Homestead freeze; this latter group assumed to make up the largest portion of those over 65, and assumed to not currently qualify for the Property Tax Credit program.

Oversight assumes there would be significant but unknown costs to the county assessors and county clerks, and officials of other political subdivisions, and has included these in the estimate of local fiscal impact.

Officials from the Department of Revenue (DOR) assume this proposal would create the Missouri Homestead Preservation Act. Anyone claiming a homestead exemption is not eligible for the property tax credit, and anyone claiming a property tax credit is ineligible for the homestead exemption. The department will provide a list of taxpayers claiming a property tax credit. The department should also receive a list of taxpayers claiming the homestead exemption, so that it can be ran against the tax records. DOR assumes this will be done with existing resources, and the Department defers to the State Tax Commission or Budget and Planning for an estimated revenue impact.

ASSUMPTION (continued)

Officials from the Department of Elementary and Secondary Education (DESE) assume this proposal would freeze the assessed value on residential property owned by a person 65 years old or older if the property has been owned at least five years and the person's adjusted gross income is less than $75,000.

This proposal would prevent the assessed valuation of residential property from keeping pace with the local economy on property sales and may result in less local revenue for taxing jurisdictions including school districts. Freezing the value of some residential property may result in less total reassessment value increase for the taxing jurisdiction. The reduced increase in total assessed valuation may result in no reduction in property tax rates that otherwise might occur per Article X of the Constitution.

Proposed subsection 137.106.6 indicates that the lost revenue resulting from the homestead exemption may be reimbursed by the state through appropriations. If the lost revenue to the local taxing jurisdiction (school district) is truly made up from state sources, the effect is neutral on the taxing jurisdiction. There is no assurance that the appropriation will be made year after year.

While the proposal does not reference the state school aid foundation formula, non-hold harmless districts (districts on the formula) could potentially recover the lost local revenues through the state aid formula rather than a separate appropriation if the appropriation for the formula would be sufficient to provide a proration factor no less than 1.00. It is unlikely that the formula would have a proration factor of 1.00. The local deductions (Line 2) in the foundation formula would not increase as much as current law provides since the assessed valuation for the district will not increase as much as it would without the exemption, thereby increasing the cost to fund the state foundation formula at a proration factor of no less than 1.00. If the formula is not funded at the 1.00 level, the school districts would need a separate payment to replace the lost revenue due to the homestead exemption.

ASSUMPTION (continued)

DESE officials assume that hold harmless districts will experience a decrease in local revenue unless the General Assembly appropriates sufficient funds to compensate for the lost revenue even if the foundation formula is funded at the 1.00 level. The lowered assessment would in three years start to reduce the increase in the state guaranteed tax base and the increased formula cost may be zeroed out after the third year for any given year's assessed value. A reduced guaranteed tax base reduces the inflationary adjustment needed in the formula for districts to fund inflationary increases of its education and operational expenses.

Appropriating funds for the homestead exemption reduces state money available for other state needs. DESE does not have data available to estimate the amount of fiscal impact at the state or local level.

Oversight assumes the Foundation Formula and other school finance issues, if any, would be addressed through the appropriation process.

Officials from the State Tax Commission (Commission) assume this proposal would create the Missouri Homestead Preservation Act. This legislation requires the Commission to promulgate rules and regulations. The Commission will assume this additional responsibility of researching and drafting such regulations with existing staff.

The commission assumes there will be a cost to the General Revenue Fund if the General Assembly appropriates money to the taxing authorities. There would be a substantial revenue loss to local political subdivisions including schools if the General Assembly does not appropriate the necessary revenue to the local political subdivisions. There could also be a substantial cost to each political subdivision to implement this proposed legislation; such cost is unknown and will vary from one political subdivision to another.

Residential Property is reassessed in odd-numbered years. Calendar year 2003 is a reassessment year with minimal assessed valuation changes to the residential property in the following year (2004). Although this legislation will be effective on January 1, 2004, we are assuming that the impact of this proposal would not be realized until the next reassessment year occurring in calendar year 2005 with the collections occurring in Fiscal Year 2006. Furthermore this legislation provides that the age and years of residence shall be determined as of January first of each odd-numbered year and shall be provided by affidavit by such date to the county assessor.

ASSUMPTION (continued)

Commission officials assume the 2002 assessment valuation for residential property is 33.1 billion dollars. A seven percent (7%) increase in the assessed valuation in 2003 would result in an additional 2.3 billion dollars in revenue. We project that in 2003 the assessment valuation for residential property will be 34.5 billion dollars. As there are minimal improvements to residential property in an even-number year, we will assume for 2004 the assessment valuation will again be approximately 35.4 billion dollars. In 2005, the next reassessment year, we assume there will be loss of revenue as a result of this legislation. Assuming that 10.3% of the residential property will be effected by this legislation and the statewide tax rate will be $6 per hundred, the revenue loss will be approximately $ 8,229,993.

According to the 2000 census information, 70.3% of the housing units are owner occupied with 10.3% of the householders 65 and older. We do not have any data available on the number of property owners 65 years and older who have used such property as a homestead for a period of less than five years. We understand that 76.4% of the property owners over 65 years of age have a household combined adjusted gross income of less than $75,000. Therefore, we are assuming for the purposes computing the loss of revenue, that all property owner who are 65 and older have resided in their owner-property for five years or more and that 76.4 % have an adjusted gross income of less that $75,000.

Projected Residential Assessment Valuation for Calendar Year 2003 is $35,400,000,000.

$35.4 Billion x 70.3% (residential property owner occupied) = $24.9 Billion

$24.9 Billion x 10.3% (residential property owner occupied over 65) = $2.5 Billion

$2,564,819,561 (65 and older, owner occupied )

$2,564,819,561 x 76.4% (65 and older, income less than $75,000) = $1,959,522,144.

$1,959,522,144 x 7% (Average reassessment increase) = $137,166,550

$137,166,550 x $6 per hundred (average state tax rate) = $8,229,993.

ASSUMPTION (continued)

Oversight assumes that actual tax collections for any individual political subdivision would be subject to overall changes in total assessed valuation, and to the effects of other statutory revenue restraints. The effects of the other revenue restraints would vary from subdivision to subdivision. Reducing the increase in assessed valuation on certain individual parcels would in turn reduce the tax rate rollback required. Oversight assumes that net losses to political subdivisions from this provision, as compared to current law are unknown but would exceed $100,000 per year.

This proposal would become effective January 1, 2004, for taxes to be collected in FY 2005. Oversight assumes that FY 2005 property tax losses would be minimal, and that the first appropriations for replacement of lost local tax revenues would be provided in FY 2006.

Oversight assumes that the impact of requiring taxpayers to choose between the Homestead Tax Exemption and the Missouri "Circuit Breaker" property tax credit is unknown, but could be significant. In addition, Oversight assumes the Homestead Tax Exemption and resulting reimbursement to taxing authorities would be greater than the property tax credit reduction because the property tax credit is computed using more restrictive income limitations. A reduction in property tax credits claimed would partially offset the General Revenue Fund cost of reimbursing lost tax revenues to the taxing authorities; however, it would increase reported personal income tax revenues.

Oversight assumes there would be losses to the Blind Pension fund of a little more than ½ of 1% of the losses to political subdivisions.

This proposal could affect total state revenues.

* expected to exceed $100,000.

FISCAL IMPACT - Small Business

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

DESCRIPTION

This proposal would create the Missouri Homestead Preservation Act:

• The assessed value of existing primary residential property owned by a person who is sixty-five years of age or older and has used the property as a homestead for at least five years would not increase so long as that person resides on the property. Age and years of residence would be provided by affidavit of the owner, to the county assessor.



• A person claiming a homestead exemption would not be eligible to claim the Missouri property tax credit, and a person claiming the property tax credit would not be eligible to claim the homestead exemption.



• No person with a household combined adjusted gross income of more than seventy-five thousand dollars would be eligible to claim the homestead exemption.



• The state tax commission would promulgate rules and regulations to administer this section in accordance with the intent of the general assembly.



• The general assembly may appropriate moneys from the state general revenue fund so that any political subdivision losing tax revenue as a result of this proposal would receive proportional restitution.



• This section would become effective January 1, 2004, and apply to all taxable years beginning after December 31, 2003. The proposal has an emergency clause.

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

This proposal could affect total state revenues.

SOURCES OF INFORMATION

Cole County Assessor

Department of Elementary and Secondary Education

Department of Revenue

State Tax Commission

Secretary of State

Mickey Wilson, CPA

Director

February 25, 2003