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

SPONSOR Carraro

ORIGINAL DATE

LAST UPDATED

2/2/07

2/3/07 HB

SHORT TITLE

Military Pension Income Tax Exemption

SB 493

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($5,910.0)

($23,640.0)

($19,700.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Military.com

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate bill 493 exempts the retirement income or pension from the personal income tax for any

person or spouse of a person honorably discharged from the armed forces and served in the

armed forces on active duty continuously for 90 days.

The effective date is January 1, 2007.

FISCAL IMPLICATIONS

The annual impact for exempting the retirement income of retired members of the armed forces

is expected to reduce personal income tax revenues by $19.7 million. Due to the timing of the

effective date, 30 percent of the reduction in tax year 2007 accrues to FY07, or $5.9 million. The

other 70 percent plus 50 percent of tax year 2008 accrues to FY08 which totals $23.6 million. In

future years, the tax year impact is distributed evenly between the fiscal years.

Senate Bill 493 – Page

2

The fiscal impact is based on 22,000 retired armed forces in New Mexico with a total of $460

million in pension income. The assumed effective income tax rate is 4.3 percent based on TRD

analysis.

SIGNIFICANT ISSUES

The language in the bill refers to the spouse but not to a surviving spouse which may have been

the intent. A surviving spouse may be implicitly included because that would be one way for a

spouse to receive military pension income but the language could be more precise.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

The following table shows all of the bills currently under consideration:

207 H Cote ARMED FORCES INCOME TAX EXEMPTION

368 H Sandoval ARMED SERVICE RETIREE INCOME TAX EXEMPTION

497 H Foley MILITARY RETIREMENT PAY TAX EXEMPTION

541 H Anderson ARMED FORCES INCOME TAX EXEMPTION

43 S Robinson MILITARY PENSION INCOME TAX EXEMPTION

492 S Carraro ARMED SERVICES INCOME TAX EXEMPTION

493 S Carraro MILITARY PENSION INCOME TAX EXEMPTION

OTHER SUBSTANTIVE ISSUES

TRD:

The measure would encourage military retirees to move to New Mexico. It is possible that

this group of individuals possesses substantial work skills that would benefit New Mexico

economic development efforts. It is sometimes argued that this group places relatively

modest demands on infrastructure (education, law enforcement, etc.) than other segments of

the population.

Individuals with incomes and other circumstances similar to people receiving the proposed

exemption are likely to view it as unfair, especially when they compete with the retirees for

jobs, and when the retirees are individuals with relatively high incomes. According to

information on the “military.com" website (http://usmilitary.about.com/), military retirement

pay can be over $9,000 monthly for high-ranking officers retiring in 2004.

The fiscal impact shown above does not reflect estimates of the potential “feedback" effects

of the proposals on the size of the New Mexico economy. Such effects might arise, for

example, if tax reductions increase investment or attract new workers to the state. At present,

the department does not have reliable means of estimating the magnitude of these effects and

their potential impact on state revenues.

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 $880 per claimant mentioned above. The $600 in

state tax savings would, for example, be reduced to $704 ($880 x .8) for a taxpayer in the

20% federal tax bracket.

NF/nt