Missouri Taxes and Tax Credits Missouri Tax Credit Review Commission September 2010

1. Missouri Taxes and Tax Credits Missouri Tax Credit Review Commission September 2010

2. Today’s Outline • Missouri’s Business Climate • Missouri’s Tax Structure and tax offsets • Missouri’s Tax Credits • And the relationship between all 3……

3. Missouri Accolades Business Climate • 3rd – Energy Cost Index (SBE Council) • 5th – Corporate Income Tax Index (Tax Foundation) • 5th – Cost of Business (CNBC’s America’s Top States for Business) • 7th – Unemployment Insurance Tax Index (Tax Foundation) • 7th – Transportation & Infrastructure System (CNBC’s America’s Top States for Business) • 8th – State & Local Taxes as a Percent of GSP (Ernst & Young COST Study) • 10th – Top Pro-Business State (Pollina Corporate Real Estate) Quality of Life • 8th – Best Quality of Life (Business Facilities) • 12th – Overall Cost of Living (ACCRA) Economy • 7th – Lowest Likelihood of Recession in Six Months (Moody’s Economy.com Risk of Recession Index, 7/19/2010)

4. Missouri: 4th Most Diversified Economy Industry Share of Missouri’s Economy(by percentage of Gross Domestic Product, 2008) Missouri GDP = $238 Billion Source: U.S. Bureau of Economic Analysis

5. Missouri Advantages • Tax-friendly state for both individuals and corporations • Stability: • One of seven states with AAA bond rating by all 3 rating agencies. • Certainty: • State and local taxes can’t be raised without voter approval.

6. Types of Taxes • Personal Taxes • Individual Income • Fiduciary • Estate • Partnership • Property

7. Types of Taxes • Business Taxes • Cigarette and other tobacco products • Corporate Franchise • Corporate Income • Financial Institution • Motor Fuel • Partnership • S Corporation • Sales/Use

8. State Tax Collections – FY10 • Individual Income 52.83% • State Sales/Use 28.37% • Other 13.97% • Corporate Income/Franchise 4.83%

9. Corporate Income Tax • Set at 6.25% of net taxable income earned by a business in MO • Allows 50% of federal income tax payments to be deducted before computing taxable income • Eg. Taxable income of $1M = an effective tax rate of only 5.2%

10. Taxable Income • Only income earned in MO is taxed • 2 options for calculating income (company choice) • Three-factor formula (sales, property, payroll) • Single-factor formula (sales) • Companies are not penalized for locating property and jobs in MO, unlike in some states • There is currently no uniform tax assessment that computes multinational corporate income tax liability

11. Sales/Use Tax • 4.225% (3% is GR) • Lower than 35 other states • Local sales/use tax range = ½ - 1% • County sales/use tax range = ¼ - 1% • Use tax imposed when tangible personal property comes in the state and is stored, used, or consumed in MO • 12 major sales/use tax exemptions

12. Property Tax • Set and administered locally • Not comparable from state to state • Assessment ratio differs among states • Tax levies vary from city to city • Assessors (human factor) • MO assessment ratio • Personal Property = 1/3 true value • Real property (land and buildings) • Commercial and industrial = 32% • Residential = 19% • Ag = 12%

13. Property Tax • Local Property Tax Rate is an aggregate of: • School levy • City levy • County levy • State levy • Other levies (road, library, sewer, ambulance, etc.) • And expressed in a tax per $100 of assessed valuation

14. Property Tax • Commercial and Industrial real property is assessed an additional county surcharge to replace revenues lost by tax exemptions of business inventories • Average county surcharge =$1.02 per $100 AV • Total average real property tax rate for commercial/industrial = $6.89 per $100 • Total average personal property tax rate = $5.87 per $100

15. Franchise Tax • Based on capital employed in a company • Rate = 1/30 of 1% or $0.33 per $1000 par value of outstanding shares and surplus or total assets • Corporations with less than $10M not taxed • Based on receivables, inventory, land and fixed assets in MO

16. Individual Income Tax • Sliding percentage scale based on income • Higher the income, higher the percentage of withholding • Income of less than $5K = 1.93% of MO Adjusted Gross Income paid in tax • Income of more than $500K = 5.40% of MO Adjusted Gross Income paid in tax

17. Taxes Typically Offset by Incentives • Individual Income • Property • Corporate Income • Partnership • S Corporation • Sales/Use tax • Financial Institutions • Premium tax

18. General Types of Tax Offsets • Tax Credit – direct reduction in tax liability prior to payment • Tax Diversion – collected taxes transferred to a specific fund to pay for specific activities • Example: local government diverts sales tax for a specific project • Tax Abatement – a freezing of current tax amount for a period of years and an exemption of future tax based on increased assessed valuation, which is sometimes coupled with a payment in lieu of tax (PILOT)) • Example: Chapter 353, Chapter 99

19. Typical Types of Tax Offset • Tax Exemption – excusing the obligation to pay a tax under specified circumstances or by certain entities • Example: manufacturing sales tax exemption • Tax Deferral – postponing payment of the tax due • Tax Deduction – lowering tax liability by reducing taxable income

20. The “Life-Cycle” of a Typical Tax Credit • The administering agency authorizes or awards tax credits to an eligible applicant for an eligible activity • The applicant performs the eligible activity • The administering agency issues tax credits to a taxpayer after verifying performance of the eligible activity • The taxpayer uses the tax credit to offset state tax liability (DOR)

21. Language of Tax Credits • Authorized/Approved/Awarded: • The administering agency determines that the applicant and proposed activity are eligible for tax credits • Issued: • The administering agency provides the tax credit to the taxpayer • Issuance may occur anywhere from the time of authorization to years later, depending on the specific program • Redeemed: • The credit is applied against state tax liability. • May be in same tax year of issuance, or spread out over several years (for carry forward credits).

22. More “Language of Tax Credits” • Refundable • Tax credits that are defined by statute to allow a refund to the taxpayer if the credit is in excess of tax liability. • Sellable/Transferable • Credit can be sold or given to another taxpayer. • Retains its original characteristics (e.g., carry forward, carry back) from year earned regardless of year purchased. • Entitlement • Credits that are required to be authorized and issued automatically if an applicant or activity meet statutorily-defined criteria. • Discretionary • Credits that can be authorized at the discretion of the administering agency, often based on a competitive process.

23. More “Language of Tax Credits” • Carry Back • Credit can be applied to tax liability from a defined number of prior tax years (e.g. 3 prior year returns) by amending a previous year’s return. • Carry Forward • Credit can be applied to tax liability in defined number of future tax years (typically 5-10 years). • Expired • Credit has reached the end of its carry forward period. • Expired-Redeemed • Credit has expired by statute but are nonetheless redeemed by taxpayer filing an amended return

24. More “Language of Tax Credits” • Certificated • Credit for which the administering agency issues a paper “certificate” • Clawback • Statutory or contractual provision enabling recapture of credits or their case equivalent for failure to perform or non-compliance.

25. More “Language of Tax Credits” • Tax Credits Outstanding • The amount of the State’s present liability for tax credits, which can be defined in two ways: • Authorizations – Forfeited – Expired – Redeemed • Issuances – Expired – Redeemed • Forfeited • Credit authorized but surrendered to the administering agency

26. More “Language of Tax Credits” • Caps • Mechanism by which the amount of tax credits are limited or “capped,” including: • Program Cap • Limit on the amount of tax credits available under the program, either annually or cumulatively • Per-Project Cap • Limit on the amount of tax credits available to any one project, taxpayer or donor under a particular program • No Cap • Without a statutory cap, the default is that there is no limit on the amount of tax credits that may be authorized or issued

27. More “Language of Tax Credits” • Sunsets • Statutorily-defined period of time for which a particular tax credit program is authorized unless affirmatively reauthorized by the legislature. • Streaming Credit • Credit authorized for a project but issued over a period of years based on the achievement of specified benchmarks

28. The Purpose of Tax Credits • Incentivize defined activities • Write down certain costs • Make projects financially feasible • Leverage additional private investment

29. Tax Credit Features • Statutes define credit amount (e.g. 15%, 25%, 50% of eligible costs or contributions) • Statutes define the tax types that may be offset • Statutes define eligible applicants and activities • Statutes define the “type of credit” (two primary types, with variances): • Contribution credit • Investment credit • If sellable, the market defines the price • Risk • Time value of money • Time of year

30. Contribution Credit • Typically awarded to a non-profit to perform an identified project • Non-profit uses credit to encourage private donations • Private donors are issued credit for specified percentage of the donation • Credits can encourage private donors to increase the size of their donations due to tax advantage • Credits not typically transferable • Credits often not redeemed (perfect carrot)

31. Contribution Credit Illustration: Project is $1,000,000 senior center. Project is awarded $250,000 in 50% credits. Donor makes contribution of $100 and gets value of donation in 50% credits or $50 Project can achieve $500,000 in funding with award.

32. Investment Credit • Credits issued to for-profit entity for performing eligible activity • Credits applied to defined, eligible costs • Credits become equity in deal • Credits make the project financially feasible • Investment credits are typically transferable and are often used as collateral with lenders • Credits have higher redemption rate

33. Investment Credit Illustration: Historic property has $1,000,000 renovation. Historic credits are 25% of eligible costs or $250,000 Owner does not have that amount of tax liability so he/she sells the credits to another taxpayer $250,000 x market rate .82 cents = $205,000 in cash toward construction costs New tax credit holder redeems dollar-for-dollar

34. Selling Credits • Time of sale – “pre-sold” or after receipt • Sale price varies due to: • Time value of money • Risk of non-performance • Limitations on redemption • Supply and demand • Who buys? • Brokers • Institutions • Wealthy individuals

35. Example – Approval Stage Project Authorized Initial Redemption Initial Issuance

36. Tax Credit Reporting Requirements • Tax Credit Accountability Act of 2004 • Reporting by recipients • General • Category-specific • Reporting by agencies • Annual Accountability Act Report • Penalties • Program-specific requirements (statute specific) • Multi-year programs often have reporting requirements tied to program benefit • E.g. Missouri Quality Jobs

37. Tax Credit Reporting Requirements • Submission of annual estimates for tax credit programs to Office of Budget and Planning • Consensus revenue estimate • Annual review and approval of program activity and next year’s estimates by Senate Appropriations and House Budget Committees • Agency testimony • Presentation of “Form 14”

38. Tax Credit Oversight • Joint Committee on Tax Policy • Legislative Oversight • State Auditor’s Office • Administering Agency

39. Tax Credit Oversight – Administering Agency • General • Tax status verification • Unauthorized workers • Program-Specific • Program participation agreements • Compliance monitoring and audits • Statutory clawbacks • Referral to the Attorney General’s Office

40. 10 Year Trend (all tax credit programs)

41. 2010 Tax Credits Authorizing More Than $5M

42. 2010 Tax Credits Issuing More Than $5M

43. 2010 Tax Credits Redeeming More Than $5M

44. Summary – Tax Credits • Tax Credit Programs: • $467.5M authorized credits total (FY-10)* • $434.5M issued credits total (FY10)* • $521.6M redeemed credits total (FY-10) * Source DOR – Authorized amounts may not reflect non-certificated credits

45. Tax Credits by Administering Agency Department of Revenue • Disabled Access-Small Business • Residential Dwelling Accessibility • Bank Franchise • Bank Tax Credit for S-Corporations • Rolling Stock • Self-Employed Health Insurance • Food Pantry • Special Needs Adoption • Peace Office Surviving Spouse • Homestead Preservation • “Circuit-breaker” (Senior Citizen Property Tax)

46. Tax Credits by Administering Agency Department of Agriculture (MASBDA): • New Generation Cooperative • Agricultural Product Utilization Contribution • Qualified Beef • Family Farm Livestock Loan

47. Tax Credits by Administering Agency Department of Health and Senior Services • Health Care Access • Shared Care Department of Social Services • Pregnancy Resource Center • Maternity Home Contribution • Domestic Violence Shelter • Residential Treatment Agency • Children in Crisis

48. Tax Credits by Administering Agency Department of Insurance • Life and Health Guaranty • Property and Casualty Guaranty • Examination Fee • Health Insurance Pool Department of Natural Resources • Charcoal Producer • Wood Energy • Alternative Fuel Stations

49. DED Tax Credits DED Entrepreneurial Programs • Certified Capital Company (expired) • Capital (expired) • Seed Capital (expired) • New Enterprise Creation (expired)

50. DED Tax Credits DED Business Development Programs • Missouri Quality Jobs • BUILD (DED/MDFB) • Development Tax Credit • Enhanced Enterprise Zone • Business Facility • Enterprise Zone (phasing out) • Rebuilding Communities • Small Business Incubator • Wine & Grape Grower • Film Production