COMMITTEE ON LEGISLATIVE RESEARCH

OVERSIGHT DIVISION

FISCAL NOTE

L.R. No.:         4495-11

Bill No.:          SCS for HCS for HB 2058

Subject:           Economic Development; Tax Credits; Taxation and Revenue

Type:              Original

Date:               May 6, 2008

Bill Summary:            This proposal provides for tax incentives for business development.

FISCAL SUMMARY

* The fiscal impact could be divided between the General Revenue Fund and the County Foreign Insurance Fund (which ultimately goes to local school districts) if some of the tax credits are utilized against insurance premium taxes.

Numbers within parentheses: ( ) indicate costs or losses.

This fiscal note contains 23 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).

* The fiscal impact could be divided between the General Revenue Fund and the County Foreign Insurance Fund (which ultimately goes to local school districts) if some of the tax credits are utilized against insurance premium taxes.

FISCAL ANALYSIS

ASSUMPTION

Officials from the Department of Economic Development (DED) state the bill increases the caps on annual issuance of tax credits under the Enhanced Enterprise Zone (EEZ) from $14 million to $24 million and Missouri Quality Jobs (MQJ) Acts from $40 to $60 million plus extends the program to August 30, 2013. The bill makes a change to the Neighborhood Assistance Tax (NAP) credit program by permanently re-allocating credits. These program changes would require an FTE plus E&E to administer this increased activity. The DED would need a person to administer the Equity Investment Tax Credit Program. The bill also creates a sales tax exemption which will have no impact on DED. This exemption and the impact would have to be projected by DoR. Credit approval is at DED discretion and applications must show positive impact over a 10 year period to be approved. The bill has an emergency clause so changes would go into effect upon passage. Other changes should have no impact on DED.

DED is not able to project the impact of the sales tax exemption. The increase of $1.5 million to the Incubator Tax Credit will decrease GR by that amount and could be offset by some unknown positive benefits. The DED is unable to project the impact of the Equity Tax Credit. The credit could reduce GR by $5 million per year and this amount could be offset by some positive economic benefits to Missouri. DED statistics show that, over a 5 year period, creation and retention of 153 new professional/technical jobs would offset the GR cost of $5 million in tax credits issued in one year.

DED assumes a positive impact on GR resulting from increases to the Missouri Quality Jobs and Enhanced Enterprise Zone tax credit caps and extension of the MQJ program. DED assumes the re-allocation of a portion of the Neighborhood Assistance Tax Credit cap to the Development Tax Credit will have no fiscal or administrative impact on DED. DED assumes an increase of $1.5 million per year in the incubator tax credit. These changes will require one FTE plus E&E. The DED assumes the Equity Investment Tax Credit will require one person to administer. DED assumes the Equity Investment Tax Credit cost $5 million per year and positive economic benefits will offset costs by year three. DED assumes costs shown in FY 09 may be needed sooner and be requested through emergency appropriation if the bill goes into effect prior to July 1, 2008 (FY 09).

Over all costs would include two personnel and associated costs which are detailed in the financial page. These costs would be offset by an unknown but positive economic benefit to Missouri. EDC - DED assumes the need for an unknown amount of FTE (a minimum of one) to provide support to the 7 member council, issue loans and grants, and collect the fee authorized. Cost of one FTE with fringes and expenses is projected but could be more. DED also assumes collection of the fee from participants. DED assumes the Council will hold an unknown amount

ASSUMPTION (continued)

of meetings and incur additional printing/binding costs. Each meeting would be projected to cost $2,446 with a minimum of 6 meetings. Additional printing/binding would be estimated to be $10,000. DED assumes any fees taken in or funds appropriated would be used to assist with grants, loans, or other assistance.

Officials from the Department of Revenue (DOR) state Personal Tax would require one Tax Processing Technician I for every 4,000 claims for each of the following parts of the bill:

            •          Section 135.562 - Homestead - Accessible; and

            •          Section 135.670 - Idle Reduction Technology

The Customer Services Section would require the following for section 135.562 (Homestead - Accessible)

            •          one Tax Collection Tech. for every additional 24,000 contacts annually on the non-delinquent tax line;

            •          one Tax Collection Tech. for every 15,000 contacts annually on the delinquent tax line;

            •          One Revenue Processing Technician for every additional 4,800 contacts annually in the field offices

The Corporate Tax Section would also require one Revenue Processing Technician I for every 5,200 additional errors generated as well as 2,080 pieces of additional correspondence generated for the Angel Investors Program.

In summary, DOR assumes the need for seven (7) new FTE at a cost of roughly $280,000 per year to administer the changes in this proposal.

Due to the Statewide Information Technology Consolidation, DOR’s response will now also reflect the cost estimates prepared by OA-IT for impact to the various systems. As a result, the impact shown may not be the same as previous fiscal notes submitted. In addition, if the legislation is Truly Agreed To and Finally Passed, the OA-IT costs shown will be requested through appropriations by OA-IT.

Office of Administration Information Technology (ITSD DOR) estimates the IT portion of this request can be accomplished within existing resources; however, if priorities shift, additional FTE/overtime would be needed to implement. Office of Administration Information Technology (ITSD DOR) estimates that this legislation could be implemented utilizing 2 existing CIT III for 2 months for modifications to MINITS. The estimated cost is $16,744.

ASSUMPTION (continued)

DOR also assumes the language added in Section 144.057 would not have a fiscal impact to the state as these munitions are already determined to be sales tax exempt based upon a letter ruling.

In response to a similar proposal from this year (HB 2058), DOR assumed the need for just one new FTE. This proposal has more changes and more tax credit programs; therefore, Oversight will assume DOR will be able to administer the programs in this proposal with three additional FTE.

Oversight has, for fiscal note purposes only, changed the starting salary for DED’s Economic Development Incentive Specialist II and DOR’s Tax Processing Tech I/Revenue Processing Tech I 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 and policy of the Oversight Subcommittee of the Joint Committee on Legislative Research. Oversight also assumes neither the DED nor the DOR will incur additional floor space expense for their additional FTEs.

Officials from the Office of Administration - Budget and Planning (BAP) state the proposal modifies various tax credit programs. These changes may induce economic activity which may indirectly generate additional general and total state revenues. BAP defers to the Department of Economic Development for an estimate of any such revenues.

This proposal excludes sales to or by public utilities and telecom providers from local sales tax. BAP defers to the Department of Revenue for an estimate of any such revenues.

This proposal creates a tax credit for the purchase and installation of idle reduction technology. This program is capped at $10 million per fiscal year not to exceed a total of $20 million. This will reduce general and total state revenues by $10 million annually

This proposal modifies the Enhanced Enterprise Zone Tax Benefit Program by prohibiting taxpayers from simultaneously receiving a tax credit under this program and the Quality Jobs Program.

This proposal increases the annual cap on the Enhanced Enterprise Zone Program from $14 million to $24 million. This will reduce general and total state revenues by $10 million annually.

This proposal exempts from property tax property within an ultimate airport boundary. BAP defers to the State Tax Commission for an estimate of any such revenues.

ASSUMPTION (continued)

This proposal creates a property tax credit program for the maintenance of qualifying railroad rolling stock. The state shall reimburse local governments for lost revenues. BAP defers to the State Tax Commission for an estimate of any such revenues.

This proposal exempts from state and local sales and use taxes sales of radios designed for the primary purpose of receiving transmission of weather forecasts and warnings provided by the National Oceanic and Atmospheric Administrations. BAP defers to the Department of Revenue for an estimate of reduced revenues.

This proposal exempts from state and local sales and use taxes all personal property included on the United States munitions list that is sold to or purchased by a foreign government for a governmental purpose. This may reduce general and total state revenues. BAP defers to the Department of Revenue for an estimate of reduced revenues.

This proposal exempts from state and local sales and use tax all utilities including telecommunication services, machinery and equipment which is used or consumed in a business facility located in a portion of an underground mine used by a qualified company under Quality Jobs. BAP defers to Department of Revenue for an estimate of any such revenues.

This proposal creates $5 million in tax credits per year to encourage equity investment in technology-based early stage Missouri companies. Credits can be carried forward for up to three years or sold. This will reduce general and total state revenues by $5 million annually. It also allows the DED to charge administrative fees for issuing these tax credits. This could raise general and total state revenues by an unknown amount. BAP defers to the Department of Economic Development for an estimate of the increased revenues.

This proposal also changes the amount of tax credits allowed for qualified research expenses from $9,700,000 million to $10 million annually. This also removes language which prohibited DED from issuing these credits after January 1, 2005. This version grants the program an increase of $10 million. This will reduce general and total state revenues by $10 million annually.

This proposal modifies the Quality Jobs Program by removing the cap on the annual amount of tax credits issued. This will reduce general and total state revenues by an unknown amount. BAP defers to the DED for an estimate of any such revenues.

Officials from the Department of Natural Resources (DNR) state changes made in section 447.708 could result in changes in the number or locations of entities utilizing the tax credits, which could change the number of people enrolling in the Brownfield Voluntary Cleanup

ASSUMPTION (continued)

Program. DNR is unable to determine the number of sites that may enroll based on the changes in the tax credits. Oversight activities of these sites would be addressed with existing resources. DNR would not anticipate a direct fiscal impact from these provisions.

Beginning January 1, 2009, but not after January 1, 2015, section 144.030 would authorize a state and local sales and use tax exemption on materials, replacement parts, and equipment purchased for use directly upon, and for the modification, replacement, repair, and maintenance of aircraft, aircraft power plants, and aircraft accessories.

Section 144.057 would authorize a state and local sales and use tax exemption on all tangible personal property included on the United States munitions list, as provided in 22 CFR 121.1, sold to or purchased by any foreign government or agency or instrumentality of such foreign government which is used for a governmental purpose.

Section 144.058 would authorize a state and local sales and use tax exemption on purchases of electricity, gas, propane, water, telecommunications services, other utilities, machinery, and equipment for a person operating a business in a mine that is not used for mining if the mine contains at least one million square feet of space for business use.

DNR’s Parks and Soils Tax Fund is derived from one-tenth of one percent sales and use tax pursuant to Section 47(a) of the Missouri Constitution. Therefore, any additional sales and use tax exemption would be an unknown loss to the Parks and Sales Tax Fund.

In response to a previous version of this proposal, officials from the Department of Insurance, Financial Institutions and Professional Registration (DIFP) stated it is unknown how many insurance companies will choose to participate in this program and take advantage of the tax credits. Premium tax revenue is split 50/50 between General Revenue and County Foreign Insurance Fund except for domestic Stock Property and Casualty Companies who pay premium tax to the County Stock Fund. The County Foreign Insurance Fund is later distributed to school districts through out the state. County Stock Funds are later distributed to the school district and county treasurer of the county in which the principal office of the insurer is located. It is unknown how each of these funds may be impacted tax credits each year.

In response to a previous version of this proposal, officials from the Office of the Secretary of State (SOS) assumed 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 the SOS for Administrative Rules is less than $2,500. The Secretary of State’s office recognizes that this is a small amount

ASSUMPTION (continued)

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.

Regarding changing the sunset date of tax credits for job retention projects authorized under the Missouri Quality Jobs Act from 2007 to 2013, Oversight assumes there would be no net fiscal impact as the credit would be issued under one program or another and with other changes in the bill, the program now has no annual cap.

Oversight assumes that without the changes to Section 32.105, the Development Tax Credit program’s annual limit would return from $6 million a year to $4 million a year. However, also without this proposal, the Neighborhood Assistance Program would revert from its cap of $16 million in FY 2007, to $18 million in FY 2009. Therefore, based upon the reallocation of the $32 million of tax credits within Section 32.105, Oversight will reflect a potential loss of $2 million annually from the DTC, and an offsetting $2 million savings from the NAP.

Oversight assumes the proposal removes the Brownfield ‘Demolition’ tax credit and incorporates it into the Brownfield ‘Remediation’ tax credit. According to DED’s Tax Credit Analysis page, the issuances for the demolition tax credit in the past three years has been $0 in FY 2005, $37,500 in FY 2006 and $0 again in FY 2007. Therefore, Oversight will not assume any savings will be realized from the removal of this program. Oversight will utilize DED’s

estimate of no impact for the changes to the Brownfield Remediation since the program is discretionary. Oversight already reflected a $0 to Unknown cost for this program since there is no annual limit and that analysis is still appropriate. Oversight assumes the changes made in this substitute may increase the utilization of the program, but that is at the discretion of the Department of Economic Development.

According to the Department of Revenue, the addition of Section 144.057 (sales tax exemption on munitions) would have no fiscal impact on the state. DOR stated this exemption is already in place with a letter ruling, and this section simply adds the language to statutes. Therefore, Oversight will not assume a loss of revenue from this section.

Oversight compared the total tax credit issuances relative to the total tax credit redemptions for the previous three years in order to determine a relationship between the two. Oversight discovered that the annual redemptions ranged from 79 percent to 118 percent of the annual issuances. Depending on the program, the redeemed credits may have been issued several years

ASSUMPTION (continued)

prior and carried forward to the years studied; however, Oversight will utilize an estimated redemption total of 98.5 percent of tax credits issued.

Oversight will range the fiscal impact of the programs from $0 (no additional tax credits will be issued) to the change in annual limits. Oversight assumes there would be some positive economic benefit to the state as a result of the changes in this proposal; however, Oversight considers these benefits to be indirect and therefore, have not reflected them in the fiscal note.

The City of St. Louis did not respond to our request for fiscal impact.

Possessor interest in property in or on ultimate airport boundary;

In response to a similar proposal from this year (HCS for HB 1836), officials from the State Tax Commission (TAX) assumed this proposal would have no fiscal impact on their organization. TAX officials stated that the proposal would nullify the assessment of this type of property, and could have a fiscal impact to local governments. TAX officials were not able to provide an

estimate of the number or current assessed valuation of eligible properties.

Oversight assumes that this part of the amendment could apply to certain leased real property which is on or adjacent to a commercial airport and owned by a political subdivision. The proposal would specify a method for determining the assessed valuation for tax purposes of such properties. Oversight assumes the assessed valuation of such properties would be reduced if this proposal was implemented. The proposal would become effective after 2008 taxes are determined and would become effective for 2009 taxes in FY 2010. Accordingly, Oversight concludes that the fiscal impact to local governments and the Blind Pension Fund for years after FY 2009 is unknown.

Property Tax Credit for Rolling Stock Expenditures

Officials from the State Tax Commission (TAX) state this part of the amendment creates a tax credit for a freight line company's ad valorem property tax. TAX assumes that only those freight line companies that are defined by Section 137.1003. (4) RSMo will be eligible for the tax credit.

There are approximately 345 freight line companies that could qualify for this credit. In calendar year 2006, the amount of freight line ad valorem property tax was $3.5 million dollars and in calendar year 2007, the amount of freight line ad valorem property tax was $4.1 million dollars.

TAX assumes that in calendar year 2008 and the subsequent following years the amount of taxes would be approximately $4 million dollars. If we assume that each of these companies will have

ASSUMPTION (continued)

significant eligible expenses to off-set the total amount of tax due, the State of Missouri will be required to annually reimburse the local political subdivision approximately $4 million dollars. This credit is effective on January 1, 2009 with the property taxes collected in FY 2010.

Oversight will use the State Tax Commission estimate of tax credits allowable and the reimbursement due to political subdivisions. The reimbursement for local revenues lost would be known in FY 2010, and appropriated and paid in FY 2011.

Section 135.155 - New or Expanded Business Facility;

Oversight assumes the changes made to the New or Expanded Business Facility program may increase the utilization of the program. The program is an entitlement program and does not have an annual cap. Therefore, Oversight assumes this part of the proposal may increase the amount of tax credits issued under the program by an unknown amount. Oversight will range the fiscal impact from this part of the proposal from $0 to (Unknown).

Sections 135.535 & 135.562 - Rebuilding Communities & Disabled Access Tax Credit;

Officials from the Department of Social Services (DOSS) assume this bill contains a number of tax incentives for business development. The only individual or "social" tax credit in the bill is the Accessible Home Tax Credit. This bill expands that tax credit to seniors (age 65 and older), as well as disabled persons. It also modifies the list of items for which the credit may be claimed to include constructing additional rooms in the dwelling or structures on the property for the purpose of accommodating the senior or person with a disability. The Department of Revenue, in consultation with the Department of Social Services, may promulgate rules and regulations necessary to administer this tax credit. Otherwise DOSS has no role in the administration of this tax credit.

 DOSS assumes the proposal would not fiscally impact their agency.

Oversight assumes this part of the proposal would earmark any unused Rebuilding Communities Program tax credits ($8 million annual cap per DED) to the new Accessible Home Tax Credit program. According to DED’s Tax Credit Analysis, the amount of tax credits issued under the Rebuilding Communities program was $1.7 million in FYs 2005, 2006, and 2007. DED’s projection for FY 2008 and FY 2009 are for issuances of $1.75 million each year. Therefore, with an $8 million annual cap, this proposal could increase tax credit issuances by $6.2 million ($8 million annual cap - $1.7 million current utilization - $100,000 current transfer to Section

135.562).

ASSUMPTION (continued)

For budgeting purposes, Oversight assumes this part of the proposal could reduce Total State Revenues by $6.2 million each year. However, since Oversight has already reflected the potential loss of the Rebuilding Communities tax credit program of up to annual limit, Oversight will assume this proposal does not increase the annual limit (of $8 million), and therefore, the fiscal impact of the proposal has already been reflected in a prior fiscal note. Therefore, even though this part of the proposal will increase utilization of the tax credit program, Oversight will not reflect an additional loss of revenue to the General Revenue Fund.

Section 144.030 - Sales tax exemption for aircraft materials, parts and equipment;

Oversight assumes this part of the proposal would have an unknown negative impact to the General Revenue Fund, the Conservation Commission Fund, the Parks Fund, the Soils and Waters Fund, and to local governments.

Section 348.434 - Agriculture Product Utilization & New Generation Coop. tax credits.

Officials from the Department of Agriculture (AGR) state this legislation will help insure the Missouri Value-Added Grants are available each year which in turn will help keep the value-added momentum going and add economic viability to Missouri's rural communities. In addition, the legislation will provide additional tax credits to at-risk farmers/producers investing in value-added ventures. AGR assumes a cost of $4 million from the increase in tax credits.

Oversight will reflect the potential of $4 million additional tax credits to be issued under this part of the proposal since the annual cap is increased from $6 million to $10 million. The programs have a sunset of December 31, 2010. This proposal extends the sunset to December 31, 2016. Oversight assumes the state would have realized a savings from no credits issued on or after January 1, 2011; however this extension of the sunset would move that savings to 2017. Credits now issued in calendar 2011 may be redeemed in FY 2012, which is beyond the scope of this fiscal note.

Section 407.1240 & 407.1249 - Travel Club Benefits;

In response to a similar proposal from this year (HB 2433), officials from the Department of Economic Development - Tourism assumed the proposal would not fiscally impact their agency.

Officials from the Office of the Attorney General did not respond to our request for fiscal impact. However, Oversight assumes this part of the proposal would not create a fiscal impact to state government.

ASSUMPTION (continued)

Section 620.050 - Entrepreneurial Development Council;

In response to a similar proposal from this year (SB 1244), officials from the Department of Economic Development (DED) assumed the need for an unknown amount of FTE (a minimum of one) to provide support to the 7 member council, issue loans and grants, and collect the fee authorized. Cost of one FTE with fringes and expenses would be estimated at $80,000. DED also assumes collection of the fee from participants. DED assumes the Council will hold an unknown amount of meetings and incur additional printing/binding costs. Each meeting would be projected to cost $1,958 with a minimum of 6 meetings = $11,748. Additional printing/binding would be estimated to be $8,500. Minimum cost would be a little over $100,000. DED assumes any fees taken in or funds appropriated would be used to assist with grants, loans, or other assistance.

This council ‘may’ impose a registration fee for entrepreneurs who desire to avail themselves of benefits. Therefore, Oversight will assume a range of $0 to Unknown (may or may not) amount of registration fees to be collected into the new fund. Oversight will also show a $0 to Unknown expense out of the fund for potential grants and financial assistance for entrepreneurs. Oversight will assume all proceeds (if any) into the fund will be spent in the same year.

Section 620.1220 - Missouri Film Commission:

Oversight assumes this part of the proposal is permits the Missouri Film Commission to have its offices outside of Jefferson City, and by itself will not fiscally impact the Department of Economic Development.

Officials from the Office of the State Treasurer assume the proposal will not fiscally impact their agency.

Officials from Kansas City and Platte County did not respond to our request for fiscal impact.

This proposal could reduce Total State Revenues.