JEFFERSON CITY, Mo. — The Missouri Department of Revenue was in the hot seat as the House Budget Committee sought answers as to why revenue collections to date are lagging by more than $500 million.
On Wednesday, some members on the committee lambasted the department for a lack of communication on the matter. They noted that humans make errors occasionally, but that the frustrating part was that the issue was the department did not communicate the problem to businesses and taxpayers.
To date, the state has collected $532 million — roughly 10 percent — less in tax revenue than in the same time frame in the previous year, not taking into account that there is a projected revenue growth for FY 2019, the current operating year, of 1.7 percent.
Yet, Joel Walters, the director of the Missouri Department of Revenue, said he still expects general revenue collections to grow to the projected level. He stated he believes that the state will still meet the 1.7 percent revenue growth when all is said and done
“I am confident of that,” Walters told members of the budget committee.
And that confidence comes from why the revenues are lagging. The reason for the current collection decline is due to a withholding error and changes made in the federal tax code.
But for several members of the committee, the frustrating part isn’t the errors, but the lack of communication from the department.
“It’s a lack of communication,” said Rep. Kip Kendrick, ranking member of the budget committee. “I’m going to have very upset constituents — everybody in this room will have very upset constituents — and somehow we’re all crossing our fingers right now hoping they’ll owe us money. That’s terrifying.”
For Rep. Robert Ross, who is on this fourth term in the House, the lack of communication has been a pattern with the Department of Revenue for years.
“Director, I appreciate you being here to answer some questions today. I am going to preface this by telling you I am frustrated,” said Ross. “There is a history of dropping the ball and bungling issues.”
He pointed to 2013 when the Department of Revenue gave the concealed carried weapon list to the Social Security Administration. Ross noted the department denied it and misled the General Assembly and the public. Then in 2018, there was a fiscal note error on a bill that was roughly $50 million off. Ross had more examples where he felt the department dropped the ball.
“I say all that to say this: we understand this was a formulaic error…the error existed in the tables and the federal changes exposed the error,” said Ross. “In each of the issues before, the problem, the major thing that made everyone of those scenarios worse was communication, a lack of communication…When we unveiled the new license plate, there was a major media campaign on that. Had press releases that went out with here’s what is coming, Missouri’s should be proud of what their new license plates will look like. But that is not the same level communication we have seen with this particular issue.”
He noted that even though taxpayers will have a lower tax liability in total, many are going to be hit with “an April surprise,” where they owe the state money. Ross said that many taxpayers are completely unaware of the issue and don’t know what is coming.
“If you would communicate that. We are all human, we all make mistakes. I understand that. But I don’t understand, could you tell me why you are not willing to communicate with Missouri taxpayers?” Ross asked Walters. “Failing, failing to disclose this to the Missouri taxpayer…is going to be the issue.”
The withholding miscalculation comes from an error in the actual formula used to do the calculations. The error in the formula has been there as far back as the department of revenue has found.
“This error has actually been in the tables for 15 years,” said Walters. “It’s been in there for 15 years, no one had ever noticed that this error was in there because the impact was relatively small.”
The formula was failing to correctly take into account the standard deduction, Walters noted. He said the individual income tax deduction was wrong, but by a small amount — $3 per pay period for someone making $30,000.
The issue was exacerbated when the standard deduction was doubled.
“So what happened was, this error that no one noticed because it was small for 15 years, suddenly became a bigger number because the standard deduction — which was the error in the calculation — became more material,” said Walters.
That issue was discovered in September 2018 and the department issued new withholding tables. But they are unclear how many businesses actually changed the withholdings to the new tables because they knew the state would be issuing new tables in January 2019.
The withholdings for state employees were not updated to the new tables after the error was discovered.
The other part of the revenue lag is changes made in the 1,100-page federal tax bill that went into effect January 1, 2018. Part of the legislation involved moving individuals away from itemized deductions and towards the standard deduction, which they doubled.
In doing so, it affected individuals who previously had more than necessary withheld in order to get a substantial tax return. Because of the changes, those individuals will not be getting the sizeable return they intended since the withholdings are more accurate for their income level.
In 2018, Missouri issued $1 billion in tax returns. Walters projects 2019 returns will be considerably less.
Walters noted that other states, such as Idaho, are having similar issues. Federal tax revenues are showing the same problem as Missouri’s, he said.