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

SPONSOR Foley

ORIGINAL DATE

LAST UPDATED 8/16/08 HB 12

SHORT TITLE Repealing the Income Tax Act

SB

ANALYST White

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY09

FY10

FY11

($413,000.0)

($903,000.0)

($1,078,000.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

House Bill 12 would lower personal income rates in the taxable year beginning January 1, 2009

and lowering it further each subsequent year eventually eliminating the tax all together by

January 1, 2012. The applicable tax rates would decrease as follows:

Others

Married

Filing

Separate Single

2009

2010

2011

2012

<$8000

<$4000 <$5500

1.7%

1.7%

1.7%

0.0%

$93.50 + 3.2% Single $93.50 + 3.2% Single

1.7%

0.0%

$136 + 3.2% Married Separate $68 + 3.2% Married Separate 1.7%

0.0%

$136 + 3.2% Others

$132 + 3.2% Others

1.7%

0.0%

$269.50 + 4.7% Single $93.50 + 3.2% Single

1.7%

0.0%

$392 + 4.7% Married Separate $68 + 3.2% Married Separate 1.7%

0.0%

$392 + 4.7% Others

$132 + 3.2% Others

1.7%

0.0%

>$8000

>$16000

$5500-$11000

$4000-$8000

$8000-$16000

>$11000

FISCAL IMPLICATIONS

Revenues from personal income taxes make up a significant portion of State general fund

revenues. Personal income tax revenues are expected to total approximately $1.09 Billion in

House Bill 12 – Page

2

fiscal year 2008 and $1.14 Billion in fiscal year 2009. Elimination of this tax would incur

permanent losses of nearly 20% of total general fund revenues. The following table was

provided by the Taxation and Revenue Department to show the estimated revenues impacts as a

result of HB12:

2009 2010 2011 2012 2013

Estimated Revenues per

current law (before

credits)

$1,225 $1,300 $1,375 $1,450 $1,550

Estimated Revenues per

new law (before credits) $400 $320 $200

Saving from credits after

2011

$70

$75

Change

($825) ($980) ($1,175) ($1,380) ($1,475)

Fiscal Year Estimates

($413) ($903) ($1,078) ($1,278) ($1,428)

In Millions

SIGNIFICANT ISSUES

By lowering and eventually eliminating the personal income tax, the State loses significant

recurring revenues which must be made up from other revenues. The personal income tax is one

of three legs which support State spending along with corporate income taxes and consumption

taxes such as gross receipts and excise taxes. The result of eliminating this leg is either

strengthening the other legs or lessening the weight of the table. Thus by repealing the personal

income tax the State will consequently be forced to raise corporate income and consumption

taxes or significantly lower State expenditure levels. In either event, as can be seen in the table

above, the loss of revenues or the loss of expenditures will have to significantly exceed $1

Billion dollars annually.

In addition to the overall loss in State revenues, elimination of the personal income tax would

greatly reduce the progressivity of the State’s overall tax system. Most tax scholars insist that

having a progressive tax system, one in which higher incomes pay higher taxes, is the only way

to ensure overall fairness amongst income levels. Eliminating the progressive personal income

tax could potentially reduce fairness throughout the overall tax system. Also elimination of the

tax would also eliminate personal income tax credits, which are designed to address various

policy issues.

ADMINISTRATIVE IMPLICATIONS

Certain administrative changes will have to take place within the Taxation and Revenue

Department however they are anticipated to be minor and not carry significant costs.

DW/mt