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 Gonzales

ORIGINAL DATE

LAST UPDATED

1/25/07

3/07/07 HB

265/aHHGAC/aHTRC/

aHFl

SHORT TITLE Local Option Compensating Taxes

SB

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

$3,690.5

Recurring Municipalities

$1,581.6

Recurring

Counties

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates SB 144, Conflicts with SB 205, Relates to SB 518, HB 374

ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)

FY07

FY08

FY09 3 Year

Total Cost

Recurring

or Non-Rec

Fund

Affected

Total

$2,200.0

$2,200.0

Non-

Recurring

General

Fund

$890.0

$890.0 Recurring General

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

New Mexico Municipal League (NMML)

Department of Finance and Administration (DFA)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of House Floor Amendment #1

The House Floor amendment to Senate Bill 265 further expands exemptions from the newly-

created local option compensating taxes created in the bill to include fuel used by commercial

electric generating facilities to generate electricity.

House Bill 265/aHHGAC/aHTRC/aHFl – Page

2

Synopsis of HTRC Amendment

The House Taxation and Revenue Committee amendment to House Bill 265 changes the

effective date of the bill’s provisions from July 1, 2007 to July 1, 2008 to give TRD enough time

to implement the changes necessary to impose the tax.

The amendment also creates a new exemption from each local option compensating tax that

would be imposed for the use of jet fuel specially prepared and sold for use in turboprop or jet

engines.

Finally, the amendment restricts tangible personal property that will be exempt from the new

local option compensating taxes to property that is subject to depreciation for federal income tax

purposes or property that cannot be obtained in sufficient quantity at comparable terms and

conditions

in New Mexico.

Synopsis of HHGAC Amendment

The House Health and Government Affairs Committee amendment to House Bill 265 widens the

range of tangible personal property that will be exempt from local option compensating taxes

created by this bill. In the original bill, tangible personal property was exempt from the new

taxes if it was subject to depreciation for federal income tax purposes and

could not be obtained

from sources within New Mexico. The amendment changes the bill so that tangible personal

property will be exempt from the new taxes if it meets either

of these two conditions.

Synopsis of Original Bill

House Bill 265 imposes local option compensating taxes in counties and municipalities. Local

option compensating taxes will be imposed at the rate of any local option gross receipts tax in

effect in a county or municipality, and collected by TRD in the same manner as the current state

compensating tax.

Local option compensating taxes will be owed to the jurisdiction in which 1) the buyer’s place of

business is located if the buyer is engaging in business in New Mexico and uses the property in

furtherance of that business, 2) the buyer’s principal office is located if the buyer is a state or

local government agency, or 3) the buyer’s residence is located if the buyer is not engaging in

business in New Mexico.

Section 9 changes the timelines for local governments to hold an election to approve or

disapprove imposition of local option taxes. Currently, such an election must be held within five

months of the date when a local option tax would take effect. The bill reduces that timeline to

three months before a local option tax would take effect.

The original bill provides an exemption from local option compensating taxes for tangible

personal property that is subject to depreciation under federal income tax purposes and tangible

personal property that cannot be obtained from a source within New Mexico. The House Health

and Government Affairs Committee amendment allows tangible personal property meeting either

of these two conditions to be exempt.

House Bill 265/aHHGAC/aHTRC/aHFl – Page

3

The bill will allow TRD to retain 3 percent of all local option compensating tax collections as an

administrative fee.

The bill has an effective date of July 1, 2007.

FISCAL IMPLICATIONS

TRD estimates the statewide compensating tax base will be about $1,657 million in FY09, and

the statewide weighted average local option tax rate will be 1.67 percent. TRD roughly estimates

that 65 percent of this base will be eligible for the local option compensating tax exemptions

provided in the bill amended by the House Health and Government Affairs Committee. This

suggests that total local option compensating taxes will be about $9.7 million in FY09 (1,657

million X .35% eligible X 1.67% tax rate).

TRD expects the exclusion of jet fuel to reduce local option compensating tax collections by an

additional $500 to $800 thousand per year (LFC assumes $650 thousand). Finally, TRD

estimates the exclusion of fuels used for power plants, such as coal and natural gas, will reduce

local option compensating tax collections by about $3.6 million per year. Therefore, the amended

bill is expected to generate a total of $5.4 million in FY09.

Three percent of this amount, or $163.1 thousand, will be retained by TRD as an administrative

fee. Of the remaining $5.4 million, TRD estimates 70 percent ($3.7 million) will go to

municipalities and 30 percent ($1.6 million) will go to counties.

The compensating tax base that will be subject to local option compensating taxes is expected to

grow by 5 percent per year.

SIGNIFICANT ISSUES

This bill makes the compensating tax rate equivalent to the gross receipts tax rate to eliminate an

incentive for New Mexico buyers to purchase goods from out-of-state vendors. According to

NMML, New Mexico businesses are currently at a disadvantage with out-of-state businesses

because the compensating tax paid on goods and services from out-of-state is lower than the

statewide gross receipts tax rate, which includes both a statewide tax and several local option

taxes.

The bill will provide an additional stream of revenue to counties and municipalities that are

currently very dependent on gross receipts tax collections. However, some local option gross

receipts taxes are earmarked for specific uses. It is unclear whether some of these specific uses

will be able to make use of more funding.

Local option gross receipts taxes that will be mirrored with new local option compensating taxes

if the bill is enacted include the supplemental municipal gross receipts tax, the municipal local

option gross receipts tax, the local hospital gross receipts tax, the county local option gross

receipts tax, and the county correctional facility gross receipts tax.

The bill allows an exemption from local option compensating taxes for certain tangible personal

property that may depreciated for federal income tax purposes and tangible personal property

that cannot be obtained within New Mexico. According to TRD, federal income tax guidelines

House Bill 265/aHHGAC/aHTRC/aHFl – Page

4

allow most types of tangible property, such as buildings, machinery, vehicles, and furniture to be

depreciated.

ADMINISTRATIVE IMPLICATIONS

TRD reports that this bill creates major administrative impacts. A new full-page CRS form will

be necessary for TRD to distribute local option compensating taxes to local governments. This,

in turn, would require at least four scanners at a cost of about $550 thousand each ($2.2 million

non-recurring) and maintenance for each scanner of about $160 thousand each ($640 thousand

recurring). Finally, five additional FTE would be required to enter data and verify distributions.

The salaries, benefits, and other recurring costs associated with these five FTE are estimated to

be $250 thousand. Without these additional resources, local option compensating tax

distributions would likely be late. The bill awards TRD an administrative fee for collection of the

new local option compensating taxes. This administrative fee should cover the recurring

administrative costs imposed on TRD by the bill, but will not be sufficient to pay for the

nonrecurring costs of purchasing scanners.

TRD notes that because the local option compensating tax exemptions for tangible personal

property that can be depreciated for federal income tax purposes and tangible personal property

that cannot be obtained in New Mexico do not also apply to the statewide compensating tax,

administration will be more complex. Taxpayer reporting would be simpler if these exemptions

were eliminated or if they also applied to the state compensating tax.

The July 1, 2008 effective date contained in the amended bill gives TRD enough time to make

these changes.

LFC notes that the proposed local option compensating tax will entail high administrative costs

to the state relative to the amount of revenue generated for counties and municipalities. While

TRD expects to have nonrecurring administrative costs of $2.2 million and recurring

administrative costs of $890 thousand, the tax will increase local government revenues by $5.3

million per year. The 3 percent administrative fee retained by TRD will cover only about 20

percent of the recurring administrative cost.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 265 duplicates Senate Bill 144.

House Bill 265 conflicts with Senate Bill 205, which also amends Section 7-20C-2 NMSA 1978.

Senate Bill 205 amends this section to include Union County in the list of counties that may

impose a local hospital gross receipts tax.

House Bill 265 relates to Senate Bill 518 and House Bill 374, which would create new local

option gross receipts taxes that would be mirrored by local option compensating taxes if House

Bill 265 is enacted. Senate Bill 518 creates a county senior citizen services gross receipts tax and

House Bill 374 creates a municipal higher education facilities gross receipts tax.

House Bill 265/aHHGAC/aHTRC/aHFl – Page

5

TECHNICAL ISSUES

TRD noted the following technical issues:

The bill provides that where a local gross receipts tax is in effect on July 1, 2008 the

corresponding local compensating tax is automatically imposed at the same rate. If the local

gross receipts tax was adopted by a vote of the electorate, the subsequent addition of local option

compensating tax may be vulnerable to challenge because it falls outside the scope of the ballot

questions approved by voters.

The bill will cause some conflicts with various tax laws that refer only to local option gross

receipts taxes. For example, many tax credits, such as the investment tax credit found in Section

7-9A-8 NMSA 1978, restrict the amount of credit that may be applied against local option gross

receipts taxes.

OTHER SUBSTANTIVE ISSUES

Equalizing gross receipts and compensating tax rates would help New Mexico comply with

future requirements of participation in the Streamlined Sales Tax Agreement.

A similar bill was passed by the legislature and vetoed by the governor in 2005 (HB 581). The

governor’s veto message stated that the bill was vetoed because it was “riddled with exemptions

that might unfairly subject certain entities to the tax but not others." House Bill 265 contains

exemptions for tangible personal property that may be depreciated for federal income tax

purposes and for tangible personal property that cannot be obtained in New Mexico, but these

exemptions apply in to all industries rather than the handful that were listed in the 2005 bill.

SS/mt