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.

Current FIRs (in HTML & Adobe PDF formats) are a vailable on the NM Legislative Website (legis.state.nm.us).

Adobe PDF versions include all attachments, whereas HTML versions may not. Previously issued FIRs and

attachments may be obtained from the LFC in Suite 101 of the State Capitol Building North.

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

SPONSOR Robinson

ORIGINAL DATE

LAST UPDATED

1/23/07

HB

SHORT TITLE Military Pension Income Tax Exemption

SB 43

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

(9,850.0)

(19,700.0)

(19,700.0) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department

Responses Received From

Taxation and Revenue Department (TRD)

Veterans Service Commission (VSC)

SUMMARY

Senate Bill 43 exempts the military pension of any person retired from the US armed forces and

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

pension income received on or after January 1, 2007.

FISCAL IMPLICATIONS

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

there are estimated to be 22,000 retirees in New Mexico 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 $19.7 million per year. Assuming tax years break evenly over fiscal

years, the FY07 reduction in taxes is $9.9 million and $19.7 million in FY07 and subsequent

years.

Senate Bill 43 – 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

stationed here and encouraging them to retire in New Mexico is an important economic

development goal. A 2005 New Mexico First 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 New Mexico

due to the exemption, New Mexico 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

“military.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.

TRD has prepared a summary of legislation and comparisons with other states and is included as

an appendix.

The Veterans Service Commission (VSC) reports that there is a significant legal issue. In the

case, Davis v. Michigan, it was argued that exempting the pensions from one class of

government employees (in this case, state employees) without extending this exemption to all

government retirement (including federal employees) was exclusionary and thus

unconstitutional. VSC feels that this bill will raise constitutional issues and likely be the subject

of litigation.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 368 is similar but exempts the earned income of military retirees up to $50 thousand

rather than the retirement benefits.

Senate Bill 43 – Page

3

TECHNICAL ISSUES

TRD notes that the language does not include surviving spouses receiving military pension

benefits and should be included if that was intended. This seems to be the suggestion by Section

1.B which refers to a spouse but does not indicate a surviving spouse.

ADMINISTRATIVE IMPACTS

TRD reports that the administrative impact would be relatively minor and would not require

additional resources.

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/csd

Senate Bill 43 – Page

4

Appendix: Present law treatment of military retirement income -- Source: Taxation and

Revenue Department

Federal tax treatment of military retirement benefits:

Military pension income is treated as taxable income for federal income tax purposes. An

exclusion is provided for survivor annuity payments. Veteran’s benefits are excluded from

income tax.

New Mexico Statutes:

New Mexico statutes follow federal law in the treatment of military retirement income. Persons

over 65 years of age are allowed an exemption from taxable income of $8,000 per person. This

exemption is reduced for taxpayers with adjusted gross income of more than $15,000 ($30,000

married) so that no exemption is available if adjusted gross income is more than $25,500

($51,000 married).

Other states’ tax treatment of military retirement income:

Most states with a personal income tax allow some form of exclusion for retirement income,

defined as government pension payments, Social Security, Railroad Retirement, private pension

plans and public or private deferred compensation plans. Two purposes are cited for these

provisions: to protect the income of retired persons and to encourage retired persons to re-locate

or to remain in the state.

The U.S. Supreme Court has ruled that states may not discriminate against federal civil service

or military pensions by providing better treatment of state pensions than is provided for federal

pensions. However, there is no federal impediment to a state providing better treatment for

public pensions than is provided for private pensions.

The following table summarizes the treatment of military pensions by the 42 states that have a

broad-based personal income tax. Of the 42 states, all but 7 provide some form of exclusion for

military pensions. In most cases, this relief is also provided for federal civilian pensions, state

and local government pensions and for Social Security income. Only 2 states (Connecticut and

New Jersey) provide relief that is targeted uniquely at military pensions.

Description:

Number of

States with

Provision:

Notes:

Full exclusion

12

AB, HI, IL, KS, LA, MA, MI, MS, NJ,

NY, PA, WI

Capped dollar amount

7

AZ, AR, KY, ME, NC, ND, WV

Capped amount and age

threshold

10

CO, DE, DC, GA, ID, IN, IA, MD, SC,

VA

Percentage of military

pension

1

CT

Amount subject to income

level

3

MO, MT, OK

No specific exclusion<1>

7

MN, CA, NE, NM, RI, UT, VT

Tax credits

2

OH, OR

Total

42