NOTE: As provided in LFC policy, this report is intended for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used in any other situation.

The LFC is only preparing FIRs on bills referred to the Senate Finance Committee, the Senate Ways and Means Committee, the House Appropriations and Finance Committee and the House Taxation and Revenue Committee. The chief clerks are responsible for preparing and issuing all other bill analyses.

Only the most recent FIR version, excluding attachments, is available on the Intranet. Previously issued FIRs and attachments may be obtained from the LFC office in Room 416 of the State Capitol Building.

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates/Conflicts with/Companion to/Relates to

SOURCES OF INFORMATION

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of SWMC Amendment

The Senate Ways and Means Committee amendment changes the effective date of the legislation from January 1, 2000 to January 1, 1999.

Fiscal Impact of the SWMC Amendment

The effect of the SWMC amendment is to make the filing and withholding requirements effective for most pass through entity filers in FY 2000. Those requirements would apply to most Personal Income Tax filers and potentially to some Corporate Income Tax Filers as well. TRD has estimated that the impact of changing the effective date would be a $12.7 million revenue increase beginning in FY 2000. $9.6 million of this would be from personal income taxes and $3.1 million from corporate income taxes.

Synopsis of HTRC Amendment

The House Taxation and Revenue amendment changes the date by which a pass through entity would be required to file an annual information return from "the fifteenth day of third month following the end of the entity's fiscal year" to the due date of the entity federal return for the taxable year.

Fiscal Impact of the HTRC Amendment

According to the Taxation and Revenue Department, the HTRC amendment moves the filing date forward two and one half months. They say that this change has a small fiscal impact in the year 2001, but no fiscal impact in FY 2000.

Synopsis of Bill

House Bill 487 would amend the withholding tax act to require "pass-through entities" to file annual information returns with the Taxation and Revenue Department and withhold taxes. Pass through entities include any business other than a sole proprietorship, an estate or trust, or other business entities taxed as a corporation for federal income tax purposes.

The information return would contain information on the entity's gross income, net income, the amount of each owner's share of income and the name, address and tax identification number for each owner entitled to a share of the entity's income. The pass through entity would be required to withhold taxes from nonresident owners an amount equal to the owner's share of net income multiplied by a rate determined by the Taxation and Revenue Department.

The legislation would become effective January 1, 2000.

Significant Issues

The Taxation and Revenue Department FIR explains that individuals and businesses receiving income from pass through entities are receiving considerable amounts of income that are escaping taxes owed to the state. In many cases, the tax avoidance is probably due to the fact that the taxpayer is unaware that he even owes tax to the state, they say.

FISCAL IMPLICATIONS

The fiscal implications from this bill are long-term. The bill does not become applicable until FY 2001, and the fiscal impact in that year is minimal according to TRD. The full year implications are significant, however. The state general fund would realize an $18.2 million gain; $12 million from personal income taxes and $6.25 million from corporate income taxes. However, TRD's FIR is not explicit as to when the full year implications would be realized.

ADMINISTRATIVE IMPLICATIONS

TRD reports that it will need additional resources to implement the reporting system. They say that they will need TRIMS (their information management system) to implement the withholding system.

POSSIBLE QUESTIONS

• In what year does the Department expect to realize the revenue increases?

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