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





SPONSOR: Wilson DATE TYPED: 2-10-99 HB
SHORT TITLE: Three Year Income Tax Deduction SB 268
ANALYST: Taylor

REVENUE



Estimated Revenue
Recurring

or Non-Rec

Fund

Affected

FY99 FY2000 FY2001 FY2002
$ 0.0 $ (32,700.0) $ (62,100.0) $ (99,100.0) Recurring General Fund



(Parenthesis ( ) Indicate Revenue Decreases)



Duplicates House Bill 342



SOURCES OF INFORMATION

Taxation and Revenue Department



SUMMARY



Synopsis of Bill



Senate Bill 268 would reduce income taxes over a three-year period by a phased in change of the income tax rate structure. In the first year, FY2000 (with tax based on income earned in calendar year 1999), the legislation proposes to add a zero tax bracket, and to lower the rates for the first three brackets and the top bracket. The following tables contrast the current rate structure with the proposed structure for single filers (41 percent of all tax filers) and married joint filers (47 percent of all filers). The rates shown in the table are marginal tax rates, meaning the rate at which additional income is taxed. The income brackets are for taxable income. Taxable income is considerably lower than adjusted gross income because of deductions and exemptions allowed.





Current Taxable Income Brackets Current Rate Proposed Taxable Income Bracket Proposed Rate
$0 to $8,000 1.7 percent $0 to $5,000 0.0 percent
$8,000 to $16,000 3.2 percent $5,000 to $16,000 3.0 percent
$16,000 to $24,000 4.7 percent $16,000 to $24,000 4.4 percent
$24,000 to $40,000 6.0 percent $24,000 to $40,000 6.0 percent
$40,000 to $64,000 7.1 percent $40,000 to $64,000 7.1 percent
$64,000 to $100,000 7.9 percent More than $64,000 7.9 percent
More than $100,000 8.2 percent This bracket eliminated


Single Filers in FY2000



Current Taxable Income Brackets Current Rate Proposed Taxable Income Bracket Proposed Rate
$0 to $5,500 1.7 percent $0 to $2,500 0.0 percent
$5,500 to $11,000 3.2 percent $2,500 to $11,000 3.0 percent
$11,000 to $16,000 4.7 percent $11,000 to $16,000 4.4 percent
$16,000 to $26,000 6.0 percent $16,000 to $26,000 6.0 percent
$26,000 to $42,000 7.1 percent $26,000 to $42,000 7.1 percent
$42,000 to $65,000 7.9 percent More than $42,000 7.9 percent
More than $65,000 8.2 percent This bracket eliminated




In FY2001, the second year of the plan, the second tax bracket is widened and the top bracket is dropped, effectively reducing the top rate from 7.9 percent to 7.1 percent.





Married Joint Filers in FY2001



Current Taxable Income Brackets Current Rate Proposed Taxable Income Bracket Proposed Rate
$0 to $8,000 1.7 percent $0 to $5,000 0.0 percent
$8,000 to $16,000 3.2 percent $5,000 to $24,000 3.0 percent
$16,000 to $24,000 4.7 percent
$24,000 to $40,000 6.0 percent $24,000 to $40,000 6.8 percent
$40,000 to $64,000 7.1 percent More than $40,000 7.1 percent
$64,000 to $100,000 7.9 percent This bracket eliminated
More than $100,000 8.2 percent This bracket eliminated

Single Filers in FY2001



Current Taxable Income Brackets Current Rate Proposed Taxable Income Bracket Proposed Rate
$0 to $5,500 1.7 percent $0 to $2,500 0.0 percent
$5,500 to $11,000 3.2 percent $2,500 to $16,000 3.0 percent
$11,000 to $16,000 4.7 percent
$16,000 to $26,000 6.0 percent $16,000 to $26,000 6.8 percent
$26,000 to $42,000 7.1 percent More than $26,000 7.1 percent
$42,000 to $65,000 7.9 percent This bracket eliminated
More than $65,000 8.2 percent This bracket eliminated




FY2002 is the last year of the proposed income tax reduction, the number of brackets is reduced to three.



Married Joint Filers in FY2002



Current Taxable Income Brackets Current Rate Proposed Taxable Income Bracket Proposed Rate
$0 to $8,000 1.7 percent $0 to $5,000 0.0 percent
$8,000 to $16,000 3.2 percent $5,000 to $24,000 3.0 percent
$16,000 to $24,000 4.7 percent
$24,000 to $40,000 6.0 percent More than $24,000 6.8 percent
$40,000 to $64,000 7.1 percent This bracket eliminated
$64,000 to $100,000 7.9 percent This bracket eliminated
More than $100,000 8.2 percent This bracket eliminated




Single Filers in FY2002



Current Taxable Income Brackets Current Rate Proposed Taxable Income Bracket Proposed Rate
$0 to $5,500 1.7 percent $0 to $2,500 0.0 percent
$5,500 to $11,000 3.2 percent $2,500 to $16,000 3.0 percent
$11,000 to $16,000 4.7 percent
$16,000 to $26,000 6.0 percent More than $16,000 6.8 percent
$26,000 to $42,000 7.1 percent This bracket eliminated
$42,000 to $65,000 7.9 percent This bracket eliminated
More than $65,000 8.2 percent This bracket eliminated


FISCAL IMPLICATIONS



TRD has estimated that the proposed changes would cost the general fund $32.7 million in FY2000, $62.1 million in FY2001, $99.1 million in FY2002 and $107 million in FY2003.



Reductions in state income taxes are partially offset in later years by increased federal income taxes as taxpayers who itemize are allowed to deduct state income taxes. For high income earners, this implies that a $1000 state income tax cut will be offset by a $300 to $400 federal income tax increase. Thus, it cost the state $1000 to save the taxpayer $600 to $700 in tax payments. TRD generally makes this point. For an example, see TRD FIR on House Bill 486.



ADMINISTRATIVE IMPLICATIONS



TRD reports that it can absorb the proposed changes within existing resources.



DISTRIBUTION OF TAX REDUCTIONS



The TRD FIR provides information as to the distributional changes implied by the proposed tax cuts. The overall reductions by income groups are summarized in the following table.



Taxable Income FY2000 FY2001 FY2002
$0 to $15,000 $28 $31 $33
$15,000 to $25,000 $53 $100 $100
$25,000 to $40,000 $66 $83 $85
$40,000 to $75,000 $75 $87 $176
More than $75,000 $243 $779 $1,452
Overall Average $ 61 $113 $117


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