Missouri continues to experience a budget shortfall after posting a $280 million surplus in the previous fiscal year which ended June 30th.
The state opened the first two months of this year $100 million dollars short of the previous year. The outlook improved in September when the shortfall was reduced to roughly $70 million thanks largely to a 2.3 percent increase in revenue collections over September 2017. But revenues backtracked again in October when collections dropped roughly $40 million behind the same month last year, ballooning the deficit for the fiscal year to $110 million. Net general revenue collections are now 6.1 percent behind where they were a year ago.
There’s thinking that the shortfall is connected to the way individual incomes taxes, far and away the biggest contributor to state general revenue collections, are determined.
The state Department of Revenue announced in September that it’s reworking the tax tables after determining it’s been under collecting income taxes from individuals.
It said the unexpected decrease in withholding is due to a longstanding inaccurate calculation of the federal tax deduction that had previously gone undetected. Federal taxes paid can be deducted on Missouri income taxes up to $5,000 for individuals and $10,000 for couples.
The department also indicated that the under collection of state income taxes is tied to the tax overhaul Congress passed in late 2017.
According to state Budget Director Haug, the Missouri income tax is based on federal adjusted gross income. Changes made on the federal level impact what the state collects. Adjusted gross income is an individual’s total gross income minus specific deductions such as student loan interest and certain contributions to IRA accounts.
Haug further points out that Missouri collections were affected by the Congressional tax overhaul which nearly doubled the standard deduction. The state’s standard deduction is the same as the federal deduction, which means for individuals it rose from $6,350 to $12,000 in 2018 while it increased from $12,700 to $24,000 for those filing jointly. Tax filers have the option of claiming the standard deduction or itemizing their deductions.
The Revenue Department’s reworking of the tax tables will correct the problem of under collections but making the adjustments midyear means taxpayers could owe more money at the end of the year.
Budget Director Haug admitted as much by predicting the budget picture would improve when the majority of tax returns are filed in March and April. “With the under withholding we expect that tax collections will be stronger in the spring,” said Haug.
Individual income tax collections account for between two-thirds and 70 percent of revenue collections.
Since the last fiscal year concluded with a $280 million surplus, the current $110 million shortfall means the state still has a $170 million cushion before any withholding of money for state services would be necessary. Haug says Missouri is one of 10 states to have a triple-A bond rating from the three major credit rating agencies because it makes budget cuts when money is short. “The reason we have that is because we have a history of when we have budget issues that we deal with those quickly and promptly and we make the hard decisions,” Haug said.
The next major undertaking in determining the condition of the state’s budget will be the consensus revenue estimate which typically takes place during the first couple of weeks in December. The consensus revenue estimate (CRE) is an agreement about the state’s financial picture between the executive and legislative branches of government along with economists from the University of Missouri.
It’s used to reformulate revenue expectations for the rest of the current fiscal year and determine expectations for fiscal year 2020 which begins July 1st.
Haug says the CRE allows elected office holders to move beyond a debate over how much revenue there is and instead focus on how to spend the money. “Instead of having differences about how much you have to spend and what you want to spend on it, with the consensus revenue estimate, you can just have the discussion of what you want it to spend on,” explained Haug.
The consensus revenue estimate was established in Missouri during the administration of Republican Governor John Ashcroft between 1985 and 1993.
Haug goes on to say lawmakers have thrown another wrinkle into the state budget. “Missouri, over the last couple of years, has passed several tax cuts which is impacting our revenue collections,” said Haug.
A bill signed into law this year will drop the individual income tax rate most Missourians pay by four-tenths of a percent. Combined with another tax cut triggered by increases in revenue collections, the rate will drop from the current 5.9% to 5.4% in January.
A measure passed in 2014 shaves off the tax rate by one-tenth of a percent if revenues rise by $150 million over any of the three previous years. That scenario triggered such reductions in 2018 and 2019 and could further reduce the rate to 5.1% when fully implemented with three more cycles possible before the measure runs its course.