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 Neville

ORIGINAL DATE

LAST UPDATED

2/07/2007

3/14/2007 HB

SHORT TITLE Food Tax Definition Changes

SB 530/aSFC/aHBIC

ANALYST Schuss/Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

*($1,229.7)

*(988.5) Recurring General Fund

*($288.3)

*($605.4) Recurring

Local

Governments

(Parenthesis ( ) Indicate Revenue Decreases)

*Note: Table reflects the net effects of a revenue decrease due to the proposed water, ice and

coffee deduction and a revenue increase due to the proposal to freeze local hold harmless

distributions to some counties and municipalities (See Fiscal Implications).

SOURCES OF INFORMATION

LFC Files

Response Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of HBIC Amendment

The House Business and Industry Committee amendment changes provisions related to the food

and medical services local government hold harmless provision that was amended into the bill by

the Senate Finance Committee. The Senate Finance Committee amendment would have frozen

the local government hold harmless distributions for the food and medical services deductions at

the local option tax rates imposed on January 1, 2007 in all counties and municipalities

.

The House Business and Industry Committee amendment would only freeze the local

government hold harmless distributions to municipalities with either a population over 10

thousand in the most recent decennial census or per capita taxable gross receipts above the

statewide average in the previous calendar year. The amendment would only freeze the hold

harmless distribution to counties with populations over 48 thousand.

Senate Bill 530/aSFC/aHBIC – Page

2

Synopsis of SFC Amendment

The Senate Finance Committee amendment to Senate Bill 530 amends Sections 7-1-6.46 and 7-

1-6.47, which were enacted in 2004 as part of the legislation to create gross receipts tax

deductions for food and medical services (HB 625). Those sections hold counties and

municipalities harmless from the food and medical service deductions by requiring TRD to

distribute to each local government an amount equal to what would have been received if the

deductions did not exist.

The provisions freeze the hold harmless distributions to local governments at the rate of the local

option tax imposed as of January 1, 2007 rather than the current local option tax rate imposed at

the time of the distribution.

Synopsis of Original Bill

Senate Bill 530 expands the definition of retail food store so that establishments with over 75

percent of sales attributable to bottled water, ice and coffee can receive the gross receipts tax

deduction for food enacted in 2004.

FISCAL IMPLICATIONS

Deduction for Water, Ice and Coffee

: TRD estimates that taxable gross receipts eligible for the

proposed deduction for water, ice and coffee will be about $23 million per year. With a statewide

tax rate of 6.6 percent, revenue will be reduced by about 1,518.0 thousand. Since the food

deduction expanded in this bill contains a local government hold harmless provision, the entire

revenue loss will be borne by the general fund. The deduction is expected to grow by about 5

percent per year.

Freeze Local Government Hold Harmless Distributions:

The House Business and Industry

amendment will cause a gradual shift of revenue from local governments to the general fund as

local option tax rates gradually creep higher. TRD reports that in the recent past, the local option

gross receipts tax rate have increased by about 0.01 percent per year. Statewide, food and

medical deductions are expected to total $3.1 billion in FY08. About 93 percent of those

deductions, or $2.9 billion, are expected to occur in counties and municipalities that will have

hold harmless distribution rates frozen at January 1, 2007 levels. An additional 0.01 percent tax

would cause a shift of about $288.3 thousand ($3.1 billion X 93% X 0.0001). The fiscal impact

will grow over time as local option tax rates creep higher and the size of the deductions grows.

The table above assumes rates continue to increase by 0.01 percent per year and that the

deductions grow by 5 percent per year.

SIGNIFICANT ISSUES

Deduction for Water, Ice and Coffee

: LFC notes that while individual deductions from the gross

receipts tax may have small fiscal impacts, their cumulative effect significantly narrows the gross

receipts tax base. Narrowing the gross receipts tax base increases revenue volatility and requires

a higher tax rate to generate the same amount of revenue.

Freeze Local Government Hold Harmless Distributions:

Current law requires TRD to transfer to

each county and municipality an amount equal to what would have been received if the food and

Senate Bill 530/aSFC/aHBIC – Page

3

medical service deductions enacted in 2004 did not exist. That amount is calculated by

multiplying deductions by the local option tax rate imposed in the area. These distributions are

meant to hold local governments harmless from any revenue loss associated with the food and

medical deductions.

As local option tax rates creep higher, the size of the hold harmless distributions the state pays

local governments grow larger. The House Business and Industry Committee amendment

protects the state general fund from losing additional revenue as the state’s larger local

governments impose higher local option gross receipts taxes.

Alternatively, the bill limits larger local governments’ ability to raise revenue through imposing

higher local option gross receipts taxes. All increments imposed after January 1, 2007 would

generate less revenue due to the provisions of the House Business and Industry Committee

amendment. Therefore, the amendment reduces the state’s 2004 commitment to hold local

governments harmless to the food and medical deductions.

Medical service receipts tend to grow faster than the rest of the gross receipts tax base, and food

receipts are one of the more stable parts of the tax base. The bill will therefore slightly reduce the

rate of growth in larger local government gross receipts tax revenues and slightly increase

revenue volatility.

Currently, New Mexico’s local governments are authorized to impose up to 4.6875 percent of

local option gross receipts taxes (that figure excludes several additional local option taxes that

have been authorized for selected local governments). On average, a local option gross receipts

tax of about 1.6 percent is actually imposed by local governments statewide. Combined with the

state gross receipts tax of 5 percent, the statewide tax rate is therefore 6.6 percent.

ADMINISTRATIVE IMPLICATIONS

TRD will potentially need to troubleshoot systems, revise forms and instructions, prepare

taxpayer education materials and instructions, and retrain personnel.

Implementation of the food and medical deductions has been unusually complicated and

expensive for TRD because of the programming needed to do hold harmless distributions for

local governments. Increasing the list of food items eligible for the food gross receipts tax

deduction will increase the cost of administering the local hold harmless distributions.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

The House Business and Industry Committee amendment to Senate Bill 530 inserts provisions

similar to those found in Senate Bill 1182. Senate Bill 1182 freezes the local hold harmless rate

for all

local governments at the tax rate imposed on January 1, 2007.

TECHNICAL ISSUES

TRD noted that original intent of the food deduction enacted in 2004 was to include food for

home consumption as defined by the federal Food Stamp program. This bill would include

receipts from companies that sell water to businesses as well as to individuals for home

Senate Bill 530/aSFC/aHBIC – Page

4

consumption. Companies delivering bottled water to both homes and businesses will have to

separate home and business sales to qualify for the deduction.

BS/SS/csd