The MISSOURI BUDGET PROJECT

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The MISSOURI BUDGET PROJECTMissouri Coalition
for Budget Policy PrioritiesAmy Blouin,
Executive Director Jennifer Hill, Chief Policy
Analyst

• 314-518-8867
• mcbpp_at_sbcglobal.net
• Prepared for the
• Missouri Legislature, Joint Tax Policy Committee
• October 2003

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MBP/MCBPPBoard of Directors

• Peggy Eshelman Lynn Lyss
• Barbara Ross Don Phares
• Nina Balsam Ellen Sherberg
• Kirsten Dunham Russ Signorino
• Joel Ferber Max Skidmore
• Marian Hartung Mark Tranel
• Mike Klein

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Missouri is a Productive State

• Gross State Product (GSP) grew from 177.104
  Billion in 2000 to 181.493 Billion in 2001
• Constitutes a growth rate of 2.4
• Compared to other Plains states, Missouri ranks
  2nd in growth of Gross State Product
• Missouris Gross State Product represents 1.8 of
  the US Gross National Product
• Missouri ranks 19th in Gross State Product
  Nationwide

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Personal Income Growth is StrongState Revenue
Growth is Not

• Missouri Personal Income has continued to grow at
  an average rate of 4.22 in the last five years,
  even with economic slump.
• Personal Income in 2001 was 159.093 Billion
• Per capita, Missouri Personal Income Ranks 29th
  Nationwide, and 5th compared to other Plains
  States
• The Problem While Personal Income is strong,
  State General Revenue Growth has declined.

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Tax comparisons with other Plains States- State
and Local as of PI

• Plains States Iowa, Kansas, Missouri, Minnesota,
  Nebraska, North Dakota, South Dakota (BEA Plains)
  and Illinois (for comparison)
• Iowa 10.7 National Rank 24
• Kansas 10.6 National Rank 28
• Minnesota 11.9 National Rank 7
• Nebraska 10.7 National Rank 25
• North Dakota 11.4 National Rank 13
• South Dakota 9.1 National Rank 46
• Illinois 10.4 National Rank 32
• Missouri 9.6 National Rank 44
• Plains Rank 7 (of 8)

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General Revenue Growth Compared with Personal
Income Growth
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General Revenue as a Percentage of Personal
Income
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Whats the Point?

• Missouri Revenue collections have not kept up
  with the growth of Total Personal Income, or the
  Gross State Product
• State Spending reflects a negative growth rate-
  even when compared to other Plains States,
  Missouris Revenue Structure is substantially
  inadequate.

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Structural Changes Created Majority of Revenue
Decline

• Hancock
• Tax Changes 1990s
• Federal Tax Reductions

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The Hancock Impact

• 1995 - 147 Million
• 1996 - 229 Million
• 1997 - 319 Million
• 1998 - 178 Million 2.9 Million
• 1999 - 98.8 Million 3 Million
• TOTAL Impact - NEGATIVE 977.7 Million

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The Tax Credits Impact

• 21 New Tax Credits Passed in 1990s, all
  implemented 1998 and on
• Annual Cost of the new tax credits alone is 170
  Million

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The State Tax ReductionsFirst Fiscal Year of
Implementation

• 1995 Disabled Circuit Breaker 2.3 Million
• 1997 Sales Tax on Food 219 Million
• 1997 Private Pensions 71.3 Million
• 1997 Maternity and Domestic Violence .9 Million
• 1997 Vending Machines 3 Million
• 1998 Circuit Breaker Expanded 35.2 Million
• 1998 Dependent Deduction 67.9 Million
• 1998 Manufacturing Sales Tax Cut 70 Million

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The State Tax ReductionsFirst Fiscal Year of
Implementation- Continued

• 1999 Personal Exemption 152.4 Million
• Self Employed Health Insurance 6 Million
• 1999 Corporate Franchise 32 Million
• 1999 Pension Deduction 5.8 Million
• 1999 Long Term Care Insurance 3 Million
• 1999 Long Term Care of Elderly 2.8 Million
• TOTAL ANNUAL REDUCTION 671.6 Million

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The State Tax Reductions (Credits and Cuts of
1990s Annual Impact)

• Annual Revenue Reduction of Tax Credits and Tax
  Cuts alone for first fiscal year of Impact is
  841.6 Million
• Reduction equals an 11 decrease in State Annual
  General Revenue
• Based on adjusted growth of revenue from 1995
  today, the annual reduction would equal 810
  Million in FY 2004
• In other words, Anticipated Total GR for FY 2004
  could be 8.177 Billion, rather than current
  7.367 Billion

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The Federal Tax Reductions- and Increased
Mandates

• Additional Federal Tax Cuts Cost State
• Bonus Depreciation 78 million in 2004
• 45 Million in 2005
• 991 Million over ten years with
  probable extension
• Estate Tax 565.6 Million (2003-2007)
• 117 Million (FY 2005)
• Additional Federal Mandates increase state costs
  without increased funds Homeland Security,
  Education, Shifting Medicare to Medicaid Costs

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The Combined Impact What Could Have Been with
Hancock

• Why mention Hancock- could have been better
  utilized as reserve fund
• Average refund is minimal, does little in terms
  of economic impact
• Total refunds combined however would have led to
  maintain state spending which has a much larger
  economic output

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The Combined Impact What Could Have Been with
tax credits and cuts

• Many of the Tax Credits and Cuts of 1990s were
  beneficial to the people of the state at the time
• However, when voted in, there was a time of
  unprecedented economic growth- growth that could
  not be sustained
• Reductions were passed without realistic
  long-term implications sized to a more
  economically sustainable growth rate
• In effect- we reduced too much and effectively
  created much of the shortfall we have today

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What Do We Do Now

• Combined state reductions, and federal tax cut
  impacts, along with increased federal mandates
  leave us with huge imbalance
• We must reconfigure our revenue structure

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Why spending is important

• How do we spur economic growth Increase demand
  in the market through spending
• The Economic Measure of State Spending IMPLAN
• Each 1 Million of GR spent (average)
  1,727,590 Output
• Jobs 33.2
• Income/Compensation 1.011 Million
• The impact of 800 million taxes output of
  1.382 Billion in the States economy (net 582
  million) 26,560 Jobs

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Why spending is importantImpact of 1 million in
Spending

• ECONOMIC OUTPUT PER MILLION SPENT
• Social Services 2,079,966
• Education 1,938,583
• Universities 2,010,559
• Job Training 2,000,696
• Child Care 2,140,806

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Specific Recommendations

• Rainy Day Fund
• Due to Hancock provisions that require a vote of
  the people for most significant tax changes, real
  improvements will not take effect for 1 years
• It makes good economic sense to tap into the
  rainy day fund while configuring a longer-term
  solution
• In addition, most states have accessed their
  Rainy Day Funds in the last three years, Missouri
  has not
• Finally, Missouri has one of the most stringent
  requirements for repayment, the legislature
  should consider reconfiguring the Rainy Day Fund
  statute so that repayment is based on economic
  recovery rather than an artificial timeline

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Specific Recommendations

• Decoupling from Federal Tax Changes
• Estate tax decoupling
• Modified Decoupling would save Missouri 471
  million over five years- includes provision
  exempting estates not subject to federal tax,
  i.e., majority of estates would be exempted
• Full Decoupling would save Missouri 565 Million
  over five years
• Bonus Depreciation Decoupling
• Would save Missouri 991 Million over ten years

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Specific Recommendations

• Corporate Tax
• Revenue Base has been declining
• LLPs LLCs, etc. Need to determine the number of
  entities, and current tax paid as such before
  determining what changes should occur
• Need for determining if current policies around
  single factor versus three factor are sustainable
  given base
• Further need to determine if the Service Economy
  offers new ways of approaching taxation, but be
  wary of taxing work related and other necessary
  services (such as child care, transportation)

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Specific Recommendations

• Income Tax Versus Sales Taxation
• Sales tax increases are one of the worst
  proposals due to impact on economic growth
  because they counter increasing demand
• Adjustment of the Income Tax Base is one of the
  most economically prudent tax increases,
  according to Nobel Prize winning MIT Economists
  Stiglitz and Brookings Institute Orszag, provided
  it is geared toward increases for those who have
  the ability to pay
• An across the board income tax increase could be
  even more beneficial if offset with an Earned
  Income Tax Credit for families at or below the
  federal EITC

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Specific Recommendations

• Provide Economic stimulators
• Encourage State Departments to purchase in-state
  products whenever possible
• Provide Incentives to encourage Missouri
  companies as well to purchase in state
• Provide Incentives to encourage Missouri
  companies to bump up hiring schedules to the
  next two-years
• Continue state spending more cuts will do more
  harm than good for our economic structure