COMMITTEE ON LEGISLATIVE RESEARCH

OVERSIGHT DIVISION

FISCAL NOTE

L.R. No.:         0761-07

Bill No.:          SCS for HCS for HB 444, 217, 225, 239, 243, 297, 402 & 172

Subject:           Taxation and Revenue - Income

Type:              Original

Date:               April 25, 2007

Bill Summary:            Would exempt Social Security benefits from income taxation.

FISCAL SUMMARY

Numbers within parentheses: ( ) indicate costs or losses.

This fiscal note contains 7 pages.

☒ Estimated Total Net Effect on All funds expected to exceed $100,000 savings or (cost).

☐ Estimated Net Effect on General Revenue Fund expected to exceed $100,000 (cost).

FISCAL ANALYSIS

ASSUMPTION

Officials from the Department of Revenue (DOR) assume this proposal would allow a deduction of Social Security benefits included in the Federal Adjusted Gross Income of a taxpayer. This deduction would require Taxation to add a line to the Form MO-A.

Personal Tax would require 2 Temporary Tax Employee for key-entry, 1 Tax Processing Tech I for every 19,000 returns to be verified by Quality Review, and 1 Tax Processing Tech I for every 2,400 pieces of correspondence. They will also require 2 Temporary Tax Employees for key-entry of 1040P & PTC forms, and 1 Tax Processing Tech I for every additional 5,000 verified returns plus correspondence on the 1040P/PTC forms.

Customer Services would require 1 Tax Collection Technician I for every 15,000 calls a year on the income tax hot line due to lack of documentation and 1 Tax Collection Technician I for every 24,000 calls a year to delinquency/collections due to lack of documentation. They will also need 1 Tax Processing Technician I for every additional 4,800 contacts in the field offices. DOR anticipates most customers will contact the department via phone, therefore, will only request 1 FTE for each of the larger field offices including Kansas City, St. Louis, and Springfield.

In summary, DOR submitted a cost estimate for eight FTE additional staff, and related equipment and expense with a total of $337,796 for FY 2008, $361,811 for FY 2009, and $370,91 for FY 2010. The DOR estimate for a similar proposal in the previous session included only three new FTE. In response to a similar proposal in the previous session (HB 1941, LR 4411-03), DOR assumed the need for three additional FTE Tax Processing Tech I plus four tax season temporary employees.

Oversight will use the previous DOR assumption, and will further assume that DOR would be able to implement the proposal with existing IT staff. If multiple provisions are enacted requiring additional staffing or if unanticipated costs are incurred, DOR could request resources through the budget process.

ASSUMPTION (continued)

Oversight has, for fiscal note purposes only, changed the starting salary for the additional staff to correspond to the second step above minimum for comparable positions in the state's merit system pay grid. This decision reflects a study of actual starting salaries for new state employees for a six month period and the policy of the Oversight Subcommittee of the Joint Committee on Legislative Research. In addition, Oversight has reduced certain equipment and expense items in accordance with Office of Administration budget guidelines. Oversight assumes that the relatively small number of additional staff can be located in existing office space.

Officials from the University of Missouri, Economic and Policy Analysis Research Center (EPARC) prepared an analysis for a proposal (HB 172, LR 771-01) which would permit individual income filers to deduct the amount of Social Security benefits included in federal adjusted gross income. This estimated fiscal impact of that proposal was $120 million.

Oversight will utilize the EPARC estimate for the initial reduction in annual tax collections. This proposal would implement the deductibility of Social Security Benefits over six years, and Oversight has calculated the estimated revenue reduction based on the percentage of Social Security income subject to deduction. Oversight has analyzed cost of living increases for social security benefits; over the past five years benefits have increased an average 2.72 percent. Oversight will assume a 2.72% annual increase in lost revenues due to anticipated cost of living increases.

ASSUMPTION (continued)

Oversight is not able to estimate the potential for revenue reductions as a result of additional taxpayers filing returns who would not have filed a tax return under existing conditions, and Oversight is not able to determine the potential for revenue reductions due to the impact of this proposal on the existing Circuit Breaker and Homestead Exemption provisions.

In response to similar proposals, officials from the Office of the Secretary of State (SOS) provided the following response:

Many bills considered by the General Assembly include provisions allowing or requiring agencies to submit rules and regulations to implement the act. The SOS is provided with core funding to handle a certain amount of normal activity resulting from each year's legislative session. The fiscal impact for this fiscal note to SOS for Administrative Rules is less than $2,500. The SOS recognizes that this is a small amount and does not expect that additional funding would be required to meet these costs. However, we also recognize that many such bills may be passed by the General Assembly in a given year and that collectively the costs may be in excess of what our office can sustain with our core budget. Therefore, we reserve the right to request funding for the cost of supporting administrative rules requirements should the need arise based on a review of the finally approved bills signed by the governor.

Officials from the Office of Administration, Division of Budget and Planning (BAP) stated that a previous version of the proposal would have no fiscal impact to their organization, and deferred to EPARC or DOR for an estimate of the revenue loss.

This proposal would reduce Total State Revenue.

FISCAL IMPACT - Small Business

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

FISCAL DESCRIPTION

The proposal would exempt Social Security benefits from state income tax.

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

Office of Administration

            Division of Budget and Planning

Department of Revenue

University of Missouri

            Economic Policy and Research Center

                                                                                                Mickey Wilson, CPA

                                                                                                Director

                                                                                                April 25, 2007