Fiscal impact reports (FIRs) are prepared by the Legislative Finance Committee (LFC) for standing finance

committees of the NM Legislature. The LFC does not assume responsibility for the accuracy of these reports

if they are used for other purposes.

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

SPONSOR Moore

ORIGINAL DATE

LAST UPDATED

1/30/07

2/1/07 HB 235/aHHGAC

SHORT TITLE Require Tax Expenditure Budget

SB

ANALYST Schardin

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY07

FY08

FY09 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

$100.0

$100.0

Non-

Recurring General

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Department of Finance and Administration (DFA)

Economic Development Department (EDD)

SUMMARY

Synopsis of HHGAC Amendment

The House Health and Government Affairs Committee amendment to House Bill 235 addresses

concerns raised by TRD. The amendment will require state agencies and local governments to

provide TRD with information necessary to complete the tax expenditure budget.

The amendment also changes the definition of a “tax expenditure" to give TRD greater flexibility

in defining the normal tax base against which tax expenditures will be measured. This change

ensures that the total tax expenditure calculation is meaningful and will eliminate unnecessary

efforts on the part of TRD.

Synopsis of Original Bill

House Bill 235 creates a new section of the Tax Administration Act (Chapter 7, Article 1 NMSA

1978) to require the Taxation and Revenue Department (TRD) to compile a tax expenditure

budget (TEB) by October 15 of each year. The TEB will include information on the three

preceding fiscal years, the current fiscal year, and the upcoming fiscal year.

Tax expenditures to be included in the TEB will be of all major general fund revenues including

gross receipts tax, compensating tax, corporate income tax, personal income tax, tobacco excise

House Bill 235/aHHGAC – Page

2

tax, liquor excise tax, severance taxes, motor vehicle excise tax, gaming excise tax, insurance

revenues, fire protection fund reversion, leased vehicle surcharge, rents and royalties, and tribal

gaming revenue.

In addition to estimated revenue forgone due to each tax expenditure, the TEB will include each

tax expenditure’s year of enactment, purpose, and repeal date (if applicable).

FISCAL IMPLICATIONS

Creation of a TEB is a difficult but achievable task that requires specialized knowledge of New

Mexico’s tax system. The first time the report is published TRD estimates needing a

nonrecurring appropriation of $100 thousand to pay a contractor to help with legal and economic

analysis. After the first year, TRD reports the TEB can be updated using existing resources. This

estimated cost is similar to the $95 thousand Minnesota’s Department of Revenue reports as the

recurring cost of producing Minnesota’s TEB.

SIGNIFICANT ISSUES

Tax expenditures are amendments to the state’s tax system that reduce revenue collections from

what they would otherwise be. They include deductions, exemptions, credits, preferential tax

rates, and any other means by which tax collections are reduced from the normal base amount. A

TEB is a document that provides information about individual tax expenditures, including

estimates of the amount of revenue lost due to each one.

Tax expenditures give preferential tax treatment to a specific group to encourage certain types of

economic activity. From a tax policy standpoint, these mechanisms by which the revenue base is

eroded should be evaluated as rigorously as appropriations.

According to a 2006 report by the American Federation of State, County and Municipal

Employees (AFSCME), 30 states regularly prepare a TEB. The nonprofit organization Good

Jobs First reports that 35 states currently publish a TEB. According to recent TEBs, the amount

of state tax revenue forgone due to tax expenditures is 53 percent in Michigan, 22 percent in

Illinois, and 20 percent in Louisiana.

Like most states, New Mexico’s tax code contains hundreds of tax expenditures. The gross

receipts and compensating tax code (Chapter 7, Article 9 NMSA 1978) includes about 100

exemptions, deductions, and credits. The personal and corporate income tax codes (Chapter 7,

Articles 2 and 2A NMSA 1978) also include dozens of tax expenditures. While many of New

Mexico’s tax expenditures have very small costs, they cumulatively represent a significant

erosion of the state’s revenue base.

Uncovering the degree of erosion in a state’s tax base is important for several reasons. Without

knowing the amount of revenue forgone due to tax expenditures, policymakers and the public

cannot know how much tax relief is being granted and to whom the benefits are accruing. Also, a

narrower tax base requires that a higher tax rate be charged on everything that remains taxable to

provide enough revenue to meet the state’s spending needs. Finally, a narrower tax base leads to

increased revenue volatility, which makes fiscal planning more difficult.

House Bill 235/aHHGAC – Page

3

Currently, the cost of New Mexico’s tax expenditures are only estimated when they are first

enacted in Fiscal Impact Reports. However, the costs of tax expenditures are rarely revisited to

assess whether they cost more or less than expected, whether costs are growing as anticipated, or

whether tax expenditures are effective.

PERFORMANCE IMPLICATIONS

Periodic review of tax expenditures adds transparency, fiscal discipline, and political

accountability to the budget process. By uncovering the cost of New Mexico’s tax expenditures,

a TEB will allow the state’s policymakers to tailor tax incentives and appropriations to better

achieve the state’s goals.

ADMINISTRATIVE IMPLICATIONS

TRD will incur significant administrative costs in publishing a TEB, especially in the first year.

These costs are detailed in the Fiscal Implications section.

OTHER SUBSTANTIVE ISSUES

TEB revenue estimates only quantify the direct effects of tax expenditures and do not attempt to

include dynamic revenue effects that may result if tax expenditures result in job creation or

increased economic activity. For this reason, tax expenditure estimates may overstate the true

costs of some successful tax incentives.

The ease of estimating the cost of tax expenditures depends on tax reporting requirements. Tax

credits must be explicitly reported on tax forms, which makes calculating their cost

straightforward. However, deductions and exemptions are not reported explicitly, with the

important exceptions of the food and medical services gross receipts tax deductions enacted in

2004, which were expected to be revenue neutral but are resulting in a revenue loss of about $30

million per year. Without explicit reporting, the costs associated with deductions and

exemptions must be estimated. These estimates are time consuming and contain some degree of

uncertainty.

One of the most difficult challenges in creating a TEB is defining the revenue base against which

tax expenditures should be measured. Much has been written about defining the base of income

and excise taxes in other states and at the federal level, but New Mexico’s gross receipts tax is

unlike most sales taxes and will be more difficult to model.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL

The amount of New Mexico’s general fund revenue eroded due to tax expenditures will continue

to be unknown. Policymakers will continue to be unable to decide whether the benefits of tax

expenditures are great enough to justify their costs.

SS/nt