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

SPONSOR Smith

ORIGINAL DATE

LAST UPDATED

1/27/06

HB

SHORT TITLE Low and Middle Income Taxpayer Tax Exemption SB 313

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(1,200.0)

(2,400.0)

(2,400.0) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates HB 385

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate Bill 313 amends the Income Tax Act to expand the income brackets for the exemption for

low- and middle-income taxpayers. The effective date is for tax years beginning January 1, 2006

forward.

FISCAL IMPLICATIONS

SB 313 would give average tax relief of $44 per return for 55 thousand returns. This will lower

personal income tax collections $1.2 million in FY06 and $2.4 million in FY07 and subsequent

years. The personal income tax revenues are distributed entirely to the general fund.

The low- and middle-income tax exemption was passed into law during the 2005 regular session

and rather than a smooth phase-out, the bill contained caps on the adjustable gross income. This

meant that many taxpayers missed out on the exemption. SB 313 corrects this anomaly. By re-

moving the caps and allowing for a phase-out, the exemption slowly fades with increased income

rather than falling dramatically once a taxpayer reaches a certain income.

Senate Bill 313 – Page

2

TECHNICAL ISSUES

TRD recommends adding language that would make it clear to the tax filer that the exemption

phases out to zero and is never a negative exemption (which would theoretically result in a tax

liability).

OTHER SUBSTANTIVE ISSUES

TRD has provided an illustration of the impacts and the phase-out:

Illustration: Current and Proposed Low-and Middle-Income Personal Income Tax Exemp-

tions

House Taxation and Revenue Committee Substitute for House Bills 410, 582, 844 and 1086, en-

acted in 2005, created a new personal income tax exemption for low- and middle-income tax-

payers. The exemption is $2,500 multiplied by the number of exemptions claimed for federal in-

come tax purposes for taxpayers in certain income ranges. Beyond a threshold level of adjusted

gross income (AGI), the exemption declines by a percentage of the increase in AGI over the

threshold. The percentage rate of decline depends on filing status, as shown in column 3 of Ta-

ble 1 below. Present law provides that the exemption is eliminated completely for taxpayer’s

with income above a cap which depends on their filing status, as indicated in column four of the

summary table. Taxpayers previously filing head of household returns will file joint returns as a

result of the new legislation and receive the same exemption levels as joint return filers. Under

the proposal, these caps would be eliminated. Under the phase out schedule for the exemptions

already in present law, exemptions would thus be available for taxpayers with AGI up to the

amounts shown in column six of the table.

Table 1: Summary -- Current and Proposed Law Exemption Variables

Filing Status

AGI

Threshold

Decline

Rate (%)

AGI Above Which

Exemption is Zero

Exemption For

Immediately

Preceding AGI*

Proposed AGI

Above which Ex-

emption is Zero*

Married Joint

$24,000

10

$40,667

$850

$49,000

Single

$16,000

15

$27,110

$925

$32,667

Married Separate $12,000

20

$20,333

$900

$24,500

*Assumes one exemption for federal tax purposes. **AGI above which exemption is zero.

Adjusted Gross Income ($)

2,500

32,667

925

New Personal Income Tax Exemption – Single Filers

Proposed Extension

0

Exemption Amount ($)

27,110

16,000

Senate Bill 313 – Page

3

As illustrated above, current statutes generate rather awkward conditions wherein the exemptions

drop to zero abruptly above the AGI cap.

1

Hence, for example, a single taxpayer claiming one

exemption for federal purposes whose adjusted income totals $27,110 would be eligible for the

new exemption totaling $925. The new exemption would vanish if the taxpayer's AGI increased

by $1 to $27,111 however. Tax savings from the $925 exemption would depend on the tax-

payer's taxable income, but probably be in the range of $25. By eliminating the AGI caps in pre-

sent law, the proposal extends the exemptions along the decline rates in present law as shown by

the dashed line in the graphic above. Thus, single taxpayers could qualify for exemptions until

their adjusted gross incomes exceeded $32,667.

Table 2: Proposed New Exemption Extension Data by Filing Status

Head of

Joint Single Household Separate All Returns

Non- Schedule B Filers

Total Tax Savings

$1,409,326 $514,895 $363,806 $14,800 $2,302,826

Number of Returns

23,388 20,117 5,926 548 49,979

Reported Exemptions

73,307 20,780 14,067 752 108,906

Average Savings Per Return ($) $60 $26 $61 $27 $46

Average Savings Per Exemption ($) $19 $25 $26 $20 $21

Schedule B Filers*

Total Tax Savings

$79,179 $31,026 $11,226 $2,843 $124,275

Number of Returns

2,725 1,739 341 52 4,857

Reported Exemptions

8,169 1,767 853 64 10,853

Average Savings Per Return

$29 $18 $33 $55 $26

Average Savings Per Exemption $10 $1 $1 $44 $3

All Filers

Total Tax Savings

$1,488,505 $545,921 $375,032 $17,643 $2,427,101

Number of Returns

26,113 21,856 6,267 600 54,836

Reported Exemptions

81,476 41,560 28,134 816 119,759

Average Savings Per Return

$57 $25 $60 $29 $44

Average Savings Per Exemption $18 $13 $13 $22 $16

Information source: compiled and calculated from 2003 New Mexico personal income tax return data. * Schedule B filers receive income from

outside and within New Mexico. They are therefore required to calculate tax obligations as if all income is earned in New Mexico and pay tax

based on the percentage of income earned in New Mexico. Estimates shown above assume Schedule B filers in receive the exemptions propor-

tion to the ratio of their New Mexico to total income. Schedule B filers tend to benefit less than other taxpayers from the new exemptions because

their incomes tend to be higher than Non-Schedule B filers.

Personal income tax return information summarized in Table 2 indicates the fiscal impacts of the

proposal would total approximately $2.4 million annually if they had been in place during the

2003 tax year. The exemptions could have been claimed on approximately 55,000 returns with

total exemptions reported of 120 thousand. Tax savings of $44 per return and $16 per exemption

would be available under the proposal. Actual impacts of the proposed extension could differ

from amounts shown in Table 2, for a number of reasons. Population increases, as well as

changes in the average number of federal exemptions, taxable and adjusted gross income will

affect the exemption amounts claimed. However, based on projections of population and income

1

The condition was caused by an apparent inconsistency between legislative intent and the manner in which the

legislation was drafted.

Senate Bill 313 – Page

4

growth, it appears that the total amount claimed each year will be relatively stable around the

$2.4 million figure. Total fiscal impacts are stable because income growth results in some new

taxpayers becoming eligible for the extended exemption while others lose eligibility because

their income grows to the point that it exceeds the implicit income caps in the phase-out formula.

NF/yr