Subject: Agriculture and Animals; Revenue Department; Tax Credits; Taxation and Revenue - Income

Bill Summary: This proposal changes provisions relating to tax credits for qualified research expenses.

ESTIMATED NET EFFECT ON GENERAL REVENUE FUND
FUND AFFECTED	FY 2009	FY 2010	FY 2011
General Revenue	($64,208 to $10,064,208)	($69,289 to $10,069,289)	($71,367 to $10,071,367)

Total Estimated Net Effect on General Revenue Fund*	($64,208 to $10,064,208)	($69,289 to $10,069,289)	($71,367 to $10,071,367)

ESTIMATED NET EFFECT ON OTHER STATE FUNDS
FUND AFFECTED	FY 2009	FY 2010	FY 2011

Total Estimated Net Effect on Other State Funds*	$0	$0	$0

* 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.

ESTIMATED NET EFFECT ON FEDERAL FUNDS
FUND AFFECTED	FY 2009	FY 2010	FY 2011


Total Estimated Net Effect on All Federal Funds	$0	$0	$0

ESTIMATED NET EFFECT ON FULL TIME EQUIVALENT (FTE)
FUND AFFECTED	FY 2009	FY 2010	FY 2011
General Revenue	1 FTE	1 FTE	1 FTE

Total Estimated Net Effect on FTE	1	1	1

☐ 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).

ESTIMATED NET EFFECT ON LOCAL FUNDS
FUND AFFECTED	FY 2009	FY 2010	FY 2011
Local Government*	$0	$0	$0

Officials from the Department of Revenue assume the proposal would not fiscally impact their agency.

In response to a previous version of this proposal, officials from the Office of Administration - Budget and Planning stated it raises the amount of tax credits authorized for qualified research expenses from $9.7 million to $10 million; therefore, general revenue and total state revenues could be lowered by that amount. These credits may be transferred, sold or assigned.

Officials from the Department of Insurance, Financial Institutions and Professional Registration (DIFP) state 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.

Officials from the Department of Economic Development (DED) state the proposal revives the Qualified Research and Development Tax Credit at a rate of $10 million per year. This cost could be offset by some positive but undetermined economic benefits to the state. Only cost is projected in this fiscal note.

DED assumes the need for one FTE Economic Development Incentive Specialist II (at $42,288 annually) and related costs to administer the program. DED assumes the new annual credit limit to be $10 million and the credit is no longer discretionary.

DED assumes the total cost of the new FTE to be roughly $85,000 annually. DED also states they have established with ITSD to set up a tax credit program for tracking. Costs is estimated at 40 hours at an hourly rate of $31.27.

Oversight has, for fiscal note purposes only, changed the starting salary for DED’s Economic Development Incentive Specialist II 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 the DED will not incur additional floor space expense for their additional FTE.

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 prior and carried forward to the years studied; however, Oversight will utilize an estimated redemption total of 98.5 percent of tax credits issued. Therefore, under this proposal, if $10,000,000 of credits are issued, Oversight would assume $9,850,000 of credits to be redeemed, reducing Total State Revenues

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

The Qualified Research tax credit program was halted in 2004 with Senate Bill 1155. No tax credits have been issued for all tax years beginning on or after January 1, 2005. Therefore, with this bill, Oversight will reflect a new potential cost of up to $10 million per year. Also, previously, the tax credit issuance was at the discretion (may) of the Department of Economic Development; however, now the program is considered an entitlement (shall).

Oversight assumes House Amendments 1 and 2 would not fiscally impact the state. Oversight assumes House Amendment 3 allows the Missouri Film Commission to be located outside of Jefferson City. Oversight assumes this is permissive in nature and would not in itself create a fiscal impact to the state.

Note: This does not reflect the possibility that some of the tax credits could be utilized by insurance companies against insurance premium taxes. If this occurs, the loss in tax revenue would be split between the General Revenue Fund and the County Foreign Insurance Fund, which ultimately goes to local school districts.

Small businesses that qualify for the Qualified Research Tax Credits may be positively fiscally impacted as a result of this proposal.

Currently, no tax credits for qualified research expenses can be approved, awarded, or issued. This bill removes these restrictions and increases the cap on the amount of these tax credits that can be authorized by the Department of Economic Development from an aggregate total of $9.7 million to an annual total of $10 million.

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

FISCAL IMPACT - State Government	FY 2009 (10 Mo.)	FY 2010	FY 2011
GENERAL REVENUE FUND

Costs - Department of Economic Development
Personal Service (1 FTE)	($31,075)	($38,409)	($39,561)
Fringe Benefits	($14,065)	($17,384)	($17,905)
ITSD expense	($1,251)	$0	$0
Expense and Equipment	($17,817)	($13,496)	($13,901)
Total Costs - DED	($64,208)	($69,289)	($71,367)
FTE Change - DED	1 FTE	1 FTE	1 FTE

Loss - Research Tax Credit program, cap of $10 million annually (620.1039)	$0 to ($10,000,000)	$0 to ($10,000,000)	$0 to ($10,000,000)

ESTIMATED NET EFFECT TO THE GENERAL REVENUE FUND	($64,208) TO ($10,064,208)	($69,289) TO ($10,069,289)	($71,367) TO ($10,071,367)

Estimated Net FTE Change for General Revenue Fund	1 FTE	1 FTE	1 FTE