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F I S C A L I M P A C T R E P O R T
SPONSOR Cote
ORIGINAL DATE
LAST UPDATED
1/28/07
3/6/07 HB 207
SHORT TITLE
Armed Forces Income Tax Exemption
SB
ANALYST Francis
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY07
FY08
FY09
($2,950.0)
($11,990.0) ($10,400.0)
Recurring General Fund
(Parenthesis ( ) Indicate Expenditure Decreases)
Relates to HB368, SB43, SB492, SB493, HB497
SOURCES OF INFORMATION
LFC Files
Taxation and Revenue Department (TRD)
Responses Received From
Taxation and Revenue Department (TRD)
Department of Military Affairs (DMA)
SUMMARY
Synopsis of Bill
House Bill 207 exempts income earned from active duty service from the state personal income
tax. The effective date is January 1, 2007 so would apply for tax year 2007.
FISCAL IMPLICATIONS
Exempting active duty salaries from personal income tax would result in an annual $10 million
reduction in personal income tax revenues going to the general fund. Since tax year 2007 is
partially over, it is assumed that 30 percent of tax year 2007 impact is in FY07 and 70 percent is
in FY08, inflating FY08 above $10 million. FY08 also contains half of tax year 2008’s impact.
According to TRD, the fiscal impact is based on approximately 7,000 active duty military in
New Mexico earning an average $45,000 per year as well as an additional 3,000 active duty
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House Bill 207 – Page
2
National Guard and army reserve members. The average tax relief to service members would be
$1,350 and $133 for National Guard and army reserve members.
ADMINISTRATIVE IMPLICATIONS
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.
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
There are several bills that have been introduced to exempt active duty military pay, military
retirement income, and earned income of military retirees. SB492 exempts all income for active
duty military. HB 368 exempts earned income by military retirees up to $50 thousand. SB 43, SB
493 and HB 497 exempt military pension income.
TECHNICAL ISSUES
According to the Department of Defense, “Active Duty" refers to “Full-time duty in the active
service of a Uniformed Service, including fulltime training duty, annual training duty, and atten-
dance while in the active service at a school designated as a Military Service school by law or by
the Secretary concerned."
TRD notes that, as written, the measure could be interpreted to include an exemption for federal
personal income tax obligations. It should be amended to clarify that it does not.
OTHER SUBSTANTIVE ISSUES
By reducing state tax obligations, the proposed measure would tend to increase federal tax
liability because state tax obligations are deductible against federal liability. Hence the net
taxpayer benefit would be less than the $1,575 per claimant mentioned above. The $1,575 in
state tax savings would, for example, be reduced to $1,260 ($1,575 x .8) for a taxpayer in the
20% federal tax bracket.
NF/nt