NOTE: As provided in LFC policy, this report is intended only 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 for other purposes.

The most recent FIR version (in HTML & Adobe PDF formats) is available on the Legislative Website. The

Adobe PDF version includes all attachments, whereas the HTML version does not. Previously issued FIRs

and attachments may be obtained from the LFC in Suite 101 of the State Capitol Building North.

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

SPONSOR: Robinson

DATE TYPED: 2/22/05

HB

SHORT TITLE: Income Tax Deduction for Business Sale

SB 549

ANALYST: Taylor

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

($875) ($1,600.0)

($1,220.0) Recurring

General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department

SUMMARY

Senate Bill 549 would provide an income tax deduction for net capital gains income from the

sale of a closely held trade or business. The size of the deduction is equal to the taxpayer’s net

capital gain from the sale of a closely held trade or business in the taxable year for which the de-

duction is being claimed, provided that the gain is included in the taxpayer’s base income.

A closely held trade or business is defined to mean a trade or business operated as a sole proprie-

torship or a corporation, partnership, limited partnership, limited liability company or other legal

entity, whose equity is controlled by 75 or few qualifying owners.

The bill carries no applicability date, and is assumed to become effective 90 days after the end of

the legislative session.

FISCAL IMPLICATIONS

TRD estimates that this bill will reduce general fund revenues by $1.6 million in FY06. The es-

timate assumes net capital gains in New Mexico will total approximately $1.5 billion annually,

and further estimated that of 3.4 percent of this was this, or $50 million was from the sale of

closely held businesses. They report that the 3.4% is drawn from I.R.S. data on the share that

small business interests represent in the composition of assets in estate tax returns. They also

Senate Bill 549 -- Page 2

note that 30 percent of capital gains will be deductible in tax year 2005. This leaves a base of

$35 million in tax year 2005 ($50 million less 30 percent deductible). The revenue loss decreases

over time, reflecting the increased proportion of capital gains that are deductible (50 percent in

2007) and phased-in income tax rate reductions.

The FY 05 fiscal impact is based on the assumption that the provisions of the bill would apply to

tax year 2005. This stems from the state’s adoption accrual revenue accounting.

ADMINISTRATIVE ISSUES

TRD reports modest administrative impacts that can be absorbed with existing resources.

TECHNICAL ISSUES

TRD provided the following technical issues:

1.

The proposal should have an applicability date explaining to which tax years the pro-

posed policy applies.

2.

As currently written, SB 549 would appear to violate the Commerce Clause since it dis-

criminates against interstate commerce by applying only to capital gains that would be al-

located or apportioned to New Mexico. The remedy to this problem would be to make

the deductions available to all taxpayers with gains from a closely-held business.

BT/lg