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

SPONSOR Hobbs

ORIGINAL DATE

LAST UPDATED

1/20/06

HB 44

SHORT TITLE Military Retirement Pension Tax Exemption

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(8,000)

(16,000)

(16,000) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates SB 210

Relates to SB 115

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

House Bill 44 exempts the military pension of any person retired from the US armed forces and

who served at least 90 consecutive days on active duty and their spouses. The exemption is for

pension income received on or after January 1, 2006.

FISCAL IMPLICATIONS

According to TRD (who uses data from Military.Com, a military service resources website),

there are estimated to be 21,300 retirees in NM in 2006 receiving an average of $21,000 per year

in payments from their pension. The exemption for the retirees would reduce personal income

tax collections by $13.4 million. Including spouses and non-resident taxpayers, the total reduc-

tion to personal income tax collections is estimated to be $16 million per tax year. Assuming tax

years break evenly over fiscal years, the FY06 reduction in taxes is $8 million and the reduction

for FY07 and subsequent years is the full $16 million.

House Bill 44 – Page 2

SIGNIFICANT ISSUES

There are also economic “feedback” impacts that are not captured in the fiscal impact analysis.

Military personnel make a significant contribution to New Mexico’s economy while they are sta-

tioned here and encouraging them to retire in New Mexico is an important economic develop-

ment goal. A 2005 New Mexico Townhall report (NM Townhall #33) indicated that 12 jobs are

supported by every million dollars of federal retirement payments (both civilian and military) in

New Mexico. That means that military retirement spending in New Mexico supports over 4,600

jobs in NM.

The amount that would be available due to the proposed exemption does not necessarily share

the properties of retirement spending as a whole since the savings from the exemption would be

considered marginal income. If it is more likely to be saved than spent, New Mexico would not

enjoy any benefit from the current retirees. To the extent that more people retire in NM due to

the exemption, NM will receive the benefit of all of their spending. It is uncertain whether the

spending of the retirees (current and newly arrived) would offset the foregone expenditure of the

state government due to the lower revenues.

TRD notes:

• Individuals with incomes and other circumstances similar the military retirees receiving

the proposed exemption are likely to view it as unfair, especially when they compete with the

retirees for jobs, and when the retirees have relatively high incomes. According to the “mili-

tary.com” website (http://usmilitary.about.com/) military retirement pay can be over $9,000

monthly for high-ranking officers retiring in 2004.

• By reducing state tax obligations, the proposed measure would tend to increase federal

tax liability because state tax obligations are deductible against federal liability for taxpayers

who itemize. Hence the net taxpayer benefit would be less than the $565 per claimant mentioned

above. The $565 in state tax savings would, for example, be reduced to $452 ($565 x .8) for a

taxpayer in the 20% federal tax bracket.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

HB 44 is similar to SB 115 except that HB 44 includes a provision for the spouses of retirees.

TECHNICAL ISSUES

TRD reports:

Provisions of the proposed measure would impose relatively minor administrative impacts on the

Taxation and Revenue Department. Provisions of the proposal could be administered with re-

sources currently available to the Department.

ALTERNATIVES

To address TRD’s note above regarding high ranking officers, the exemption could be written

with a phase-out at higher income levels.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

Military retirees’ pensions will still be subject to NM personal income tax.

NF/mt