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F I S C A L I M P A C T R E P O R T

SPONSOR Altamirano

ORIGINAL DATE

LAST UPDATED

1/31/07

HB

SHORT TITLE

Accelerate Income Tax Rate Reductions

SB 265

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($19,800.0)

($46,200.0)

Non-Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate Bill 265 accelerates the current phase-in of the personal income tax rate reductions.

Under current law, the top personal income tax rate will be 5.3 percent in tax year 2007 and 4.9

percent in 2008. This bill would accelerate the schedule so the rate would be 4.9 percent in 2007

forward, a reduction of 0.4 percent in the top personal income tax rate in 2007.

Tax Rate Cut

Tax Year Current Law SB265

2006

5.3%

5.3%

2007

5.3%

4.9%

2008

4.9%

4.9%

Senate Bill 265 – Page

2

FISCAL IMPLICATIONS

Using a model provided by the Taxation and Revenue Department (TRD), the full year impact

would be a $66 million reduction in personal income tax collections. Thirty percent of the

impact, or $19.8 million, occurs in FY07 because the first quarter of 2007 personal income tax

collections will have been at the current rates. In FY08, the impact is $46.2 million or 70 percent

of the tax year impact. This is a revised methodology from previous estimates agreed upon

by LFC and TRD. While this would reduce current estimates of recurring general fund

revenues, the reduction is only for these two fiscal years and does not recur in the future.

SIGNIFICANT ISSUES

In 2003, legislation was enacted lowering the top rate and collapsing the number of income

brackets. In 2002, the top rate on taxable income over $100,000 for married filers and $65,000

for single filers was 8.2 percent. As a result of the 2003 legislation, by tax year 2007, the top

rate would decrease to 4.9 percent and the top income bracket would begin at $24,000 in taxable

income for married filers and $16,000 for single filers. In the 2005 session, the phase-in schedule

for the top rate decrease was delayed until 2008 and the head-of-household filing status was

merged with the married filing jointly status. The schedule was modified again in the 2005

special session as revenues came in stronger than expected. This bill restores the final phase-in

year to 2007 rather than 2008. See table one for details about the changes to the personal income

tax law over the last four years.

Table 1: Proposed Rate Schedule

Taxable Income

Married Filing

Jointly,

Surviving

Spouses, Head

of Household

Married

Filing

Separate

Single

2005 2006 2007 2008

<8000

<4000

<5500

1.7% 1.7% 1.7% 1.7%

8000-16000 4000-8000 5500-11000

3.2% 3.2% 3.2% 3.2%

16000-24000 8000-12000 11000-16000

4.7% 4.7% 4.7% 4.7%

24000+

12000+

16000+

5.7% 5.3% 4.9% 4.9%

Based on 2005 tax return data, a married filing jointly taxpayer reporting $24 thousand in taxable

income has total adjusted gross income (AGI) of about $40 thousand. For singles reporting

taxable income of $16 thousand, their AGI starts at $25 thousand. 311,000 taxpayers will

receive the benefit of the lower rate, all of them above these AGI levels.

ADMINISTRATIVE IMPLICATIONS

This change would require the Taxation and Revenue Department to modify withholding tables

and instructions for 2007 but otherwise should pose little administrative burden.

Senate Bill 265 – Page

3

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

The executive has proposed lowering the rate to 5.1 percent in tax year 2007.

NF/nt