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F I S C A L I M P A C T R E P O R T
SPONSOR Smith
ORIGINAL DATE
LAST UPDATED
2/19/07
HB
SHORT TITLE
WORKING FAMILY & ARMED SERVICES TAX
CREDIT
SB 1156
ANALYST Francis
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY07
FY08
FY09
($22,750.0)
($91,125.0)
($50,621.0) Recurring General Fund
(Parenthesis ( ) Indicate Revenue Decreases)
SOURCES OF INFORMATION
LFC Files
Responses Received From
Taxation and Revenue Department (TRD)
Department of Finance and Administration (DFA)
Human Services Department (HSD)
Department of Health (DOH)
Department of Veteran Services (DVS)
SUMMARY
Synopsis of Bill
Senate Bill 1156 combines several tax related provisions together: personal income tax rate
reduction, active duty military personal income tax exemption, working families tax credit and a
gross receipts tax credit for private hospitals.
Personal Income Tax Rate Reduction. This section accelerates the current phase-in of the
personal income tax rate reductions. Under current law, the top personal income tax rate will be
5.3 percent in tax year 2007 and 4.9 percent in 2008. This bill would accelerate the schedule so
the rate would be 4.9 percent in 2007 forward, a reduction of 0.4 percent in the top personal
income tax rate in 2007. This is effective January 1, 2007.
pg_0002
Senate Bill 1156 – Page
2
Table 1: Tax Rate Cut
Tax Year Current Law SB265
2006
5.3%
5.3%
2007
5.3%
4.9%
2008
4.9%
4.9%
Active Duty Military Exemption. This section exempts income earned from active duty service
from the state personal income tax. The effective date is January 1, 2007 so would apply for tax
year 2007.
Working Families Tax Credit. This section creates a new personal income tax credit called the
“Working Families Tax Credit" (WFTC) that is calculated as 10 percent of the federal Earned
Income Credit (EIC). The credit is refundable, meaning if the credit exceeds the taxpayer’s
liability, the excess is refunded to the taxpayer. SB 317 also amends the low-income
comprehensive tax rebate (LICTR) to make a taxpayer ineligible for LICTR if the taxpayer
receives the WFTC. SB 317 also explicitly excludes credits provided in the Income Tax Act
from the calculation of modified gross income. The effective date is January 1, 2007.
Gross Receipts Tax Credit for Certain Hospitals. This section provides a gross receipts tax
credit for hospitals licensed by the Department of Health (for-profit hospitals). The credit equals
one third of the state gross receipts tax rate in FY08, two-thirds of state gross receipts tax in
FY09, and the entire state gross receipts tax rate in FY10 and beyond. The bill will be applicable
to tax reporting periods after July 1, 2007.
FISCAL IMPLICATIONS
Table 2: Fiscal Impact of SB1156
FY07 FY08 FY09
Working Families Tax
Credit
Enacts a 10% credit based on
federal EITC; Cannot be
claimed if LICTR is claimed.
-
(27,900)
(29,100)
Accelerate PIT rates to
4.9 percent
Reduces tax year 2007 top
personal income tax rate to 4.9
percent.
(19,800)
(46,200)
-
Armed Forces
Exemption
Exempts active duty military
from personal income tax
(2,950)
(11,990)
(10,400)
GRT Credit for Hospitals Provides private hospitals with a
gross receipts tax credit; phased
in over three years.
-
(5,035)
(11,121)
Total Fiscal Impact
(22,750)
(91,125)
(50,621)
Personal Income Tax Rate Reduction. Using a model provided by the Taxation and Revenue
Department (TRD), the full year impact would be a $66 million reduction in personal income tax
collections. Thirty percent of the impact, or $19.8 million, occurs in FY07 because the first
pg_0003
Senate Bill 1156 – Page
3
quarter of 2007 personal income tax collections will have been at the current rates. In FY08, the
impact is $46.2 million or 70 percent of the tax year impact. While this would reduce current
estimates of recurring general fund revenues, the reduction is only for these two fiscal years and
does not recur in the future.
Active Duty Military Exemption. Exempting active duty salaries from personal income tax
would result in a $10 million reduction in personal income tax revenues going to the general
fund. Since the tax year straddles two fiscal years, the FY07 impact is $3 million, reflecting 30
percent of the tax year and the FY08 impact is $12 million, which include 70 percent of tax year
2007 and 50 percent of tax year 2008.
According to TRD, the fiscal impact is based on approximately 7,000 active duty military in
New Mexico earning an average $45,000 per year as well as an additional 3,000 active duty
National Guard and army reserve members. The average tax relief to service members would be
$1,350 and $133 for National Guard and army reserve members.
Working Families Tax Credit. Enacting this credit would reduce general fund personal income
tax revenue by $30 million per tax year. Even though the credit is for tax year 2007, it is
assumed that it will be claimed in the filing season in 2008 and so all of the impact is in FY08.
The credit is expected to grow to $30.2 million in FY09.
In 2004, 199,552 New Mexican taxpayers received the federal EIC and 90 percent of the credits
were in excess of liability. A total of $364 million in EIC were claimed. Using this number as
the base, the cost to the state of the WFTC would be $36.4 million. Some of those taxpayers
would find it more beneficial to file for the LICTR and that would reduce the impact on the
general fund to $27.9 million. Figure one shows the total net benefit—the additional benefit of
WFTC above LICTR—by income cohort. The average benefit for all taxpayers is $200. Table
two shows that 64 percent of the benefit goes to heads of household or single parents and most of
them are in the $10,001 to $20,000 income range.
Figure One: Average Benefit by Income Cohort
$145
$273
$162
$52
$200
$0
$50
$100
$150
$200
$250
$300
$0 to
$10,000
$10,001 to
$20,000
$20,001 to
$30,000
$30,001 to
$40,000
Total
Gross Receipts Tax Credit for Certain Hospitals. All of the state’s for-profit hospitals are
currently located within municipal areas, where the state tax rate is 3.775 percent. Therefore, the
pg_0004
Senate Bill 1156 – Page
4
credit will eliminate the state gross receipts tax paid by for-profit hospitals once it is fully phased
in. The bill does not apply to local option gross receipts taxes, so for-profit hospitals will still pay
a little over 1 percent local gross receipts tax.
A New Mexico Hospital Association survey on hospital gross receipts indicates that for-profit
hospitals paid gross receipts tax of $16.5 million in FY05 and $21.4 million in FY06, of which
60 percent went to the state and 40 percent went to local governments. Assuming that the
impacted tax base will grow by 10 percent each year, the credit will reduce general fund revenue
by about $5,034.9 thousand in FY08, $11,120.8 thousand in FY09, and $18,252.7 thousand once
it is fully phased-in in FY10.
SIGNIFICANT ISSUES
Personal Income Tax Rate Reduction. In 2003, legislation was enacted lowering the top rate
and collapsing the number of income brackets. In 2002, the top rate on taxable income over
$100,000 for married filers and $65,000 for single filers was 8.2 percent. As a result of the 2003
legislation, by tax year 2007, the top rate would decrease to 4.9 percent and the top income
bracket would begin at $24,000 in taxable income for married filers and $16,000 for single filers.
In the 2005 session, the phase-in schedule for the top rate decrease was delayed until 2008 and
the head-of-household filing status was merged with the married filing jointly status. The
schedule was modified again in the 2005 special session as revenues came in stronger than
expected. This bill restores the final phase-in year to 2007 rather than 2008. See table one for
details about the changes to the personal income tax law over the last four years.
Table 1: Proposed Rate Schedule
Taxable Income
Married Filing
Jointly,
Surviving
Spouses, Head
of Household
Married
Filing
Separate
Single
2005 2006 2007 2008
<8000
<4000
<5500
1.7% 1.7% 1.7% 1.7%
8000-16000 4000-8000 5500-11000
3.2% 3.2% 3.2% 3.2%
16000-24000 8000-12000 11000-16000
4.7% 4.7% 4.7% 4.7%
24000+
12000+
16000+
5.7% 5.3% 4.9% 4.9%
Based on 2005 tax return data, a married filing jointly taxpayer reporting $24 thousand in taxable
income has total adjusted gross income (AGI) of about $40 thousand. For singles reporting
taxable income of $16 thousand, their AGI starts at $25 thousand. 311,000 taxpayers will
receive the benefit of the lower rate, all of them above these AGI levels.
Working Families Tax Credit. Twenty states, including the District of Columbia, currently
offer a state level EIC (Colorado’s EIC is tied to their TABOR rules and so some years they do
not allow the credit). The credit has proven to be a simple and efficient credit. It is also popular
since it only goes to individuals and families with earned income. One of the key elements is the
refundability of the credit: the taxpayer receives the full amount of the credit regardless of the tax
liability. Twelve of the seventeen state EICs are refundable, according to research at the Institute
on Taxation and Economic Policy. New York and Vermont have the most generous EICs
pg_0005
Senate Bill 1156 – Page
5
allowing over 30 percent of the federal credit and making it refundable. Rhode Island has a 25
percent credit but it is not refundable which restricts its effectiveness.
TABLE 1: STATE EARNED INCOME TAX CREDITS BASED ON THE FEDERAL EITC
State
Percentage of Federal
Credit
(Tax Year 2006
Except as Noted)
Refundable
Workers Without
Qualifying Children
Eligible.
Delaware
20%
No
Yes
District of Columbia
35%
Yes
Yes
Indiana
a
6%
Yes
Yes
Illinois
5%
Yes
Yes
Iowa
6.5%
No
Yes
Kansas
15%
Yes
Yes
Maine
5%
No
Yes
Maryland
b
20%
Yes
No
Massachusetts
15%
Yes
Yes
Michigan
10% (effective in 2008; to
20% in 2009)
Yes
Yes
Minnesota
c
Average 33%
Yes
Yes
Nebraska
8%
Yes
Yes
New Jersey
d
20%
Yes
No
New York
e, f
30%
Yes
Yes
Oklahoma
5%
Yes
Yes
Oregon
5% (to 6% in 2008)
Yes
Yes
Rhode Island
25%
Partially
g
Yes
Vermont
32%
Yes
Yes
Virginia
20%
No
Yes
Wisconsin
4% - one child
4% - one child
No
14% - two children
14% - two children
43% - three children
43% - three children
Notes: From 1999 to 2001, Colorado offered a 10% refundable EITC financed from required rebates under the state’s “TABOR" amendment.
Those rebates, and hence the EITC, were suspended beginning in 2002 due to lack of funds and again in 2005 as a result of a vot er-
approved five-year suspension of TABOR. Under current law, the EITC is projected to resume in 2010.
a Presently scheduled to expire in TY 2011.
b Maryland also offers a non-refundable EITC set at 50 percent of the federal credit. Taxpayers in effect may claim either the refundable
credit or the non-refundable credit, but not both.
c Minnesota’s credit for families with children, unlike the other credits shown in this table, is not expressly structured as a percentage of the
federal credit. Depending on income level, the credit for families with children may range from 25 percent to 45 percent of the federal credit;
taxpayers without children may receive a 25 percent credit.
d The New Jersey credit is available only to families with incomes below $20,000.
e The New York credit would be reduced automatically to the 1999 level of 20 percent should the federal government reduce New York’s
share of the TANF block grant.
f Beginning in 2006, New York also allows certain non-custodial parents who are making child support payments to claim an EITC that is the
greater of 20 percent of the federal EITC that they would be eligible for with one qualifying child as a custodial parent or 250 percent of the
federal EITC for taxpayers without qualifying children.
g Rhode Island made a very small portion of its EITC refundable effective in TY 2003. In 2006, the refundable portion was increased from 10
percent to 15 percent of the nonrefundable credit (i.e. 3.75 percent of the federal EITC).
Source: Economic Policy Institute (
www.epi.org
)
pg_0006
Senate Bill 1156 – Page
6
For a single or married taxpayer with no children, the cut-off for benefits is very low but for
taxpayers with children, the benefit goes to many more. The federal EIC can only be claimed if
someone is below the income cut-offs and
•
has a valid social security number
•
is not filing separately
•
is a US citizen or resident alien
•
does not have foreign income
•
does not have more than $2,800 in investment income
•
has some earned income.
Table one shows the cut-off and peak amounts and the maximum credit for each class of filer.
For example, a married filer with one child and adjusted gross income of between $8,000 and
$16,500 would receive the maximum federal credit of $2,747 (state credit = $275). The same
filer with income over $34,001 in adjusted gross income would receive no federal credit and,
thus, no state credit.
Table 1: Federal Income Cut-offs for Earned Income Credit
Maximum
Credit
Cut-off
Start Finish
Single
No children
12,120
5,500
6,500
412
One child
32,001
8,500
14,500
2747
More than one child
36,348
11,500
14,500
4536
Married
No children
14,120
5,500
8,500
412
One child
34,001
8,000
16,500
2747
More than one child
38,348
11,500
16,500
4536
Source: IRS 2006 Tax Year
Peak
Adjusted
Gross Income
For filers without children, they must be age 25 to 65, not a qualifying child or dependent of
another person and must have lived in the United States for more than six months. For filers
with children, the children must be younger than 19, younger than 25 if a full time student, or
permanently disabled. The children also have to have lived with the filer for more than six
months and cannot be claimed as a qualifying child or dependent of another person.
pg_0007
Senate Bill 1156 – Page
7
Figure Two: Working Families Tax Credit Phase-out
0
50
100
150
200
250
300
350
Source: TRD
One of the features of the EIC is that it phases-out at higher incomes. Figure two, which is based
on 2005 data, shows the maximum average credit of about $325, which would be $3,250 for the
federal EIC, is reached at an income level of $13,000. This is an average of all tax filers, whether
single or not or childless or not.
pg_0008
Senate Bill 1156 – Page
8
Table 2: Average Benefit by Filing Status and Income
Total Benefits
Number of
Returns
Avera
g
e Benefits
per Return
Share of
Total
Benefits
Single
$0 to $10,000
$594,047
6,984
$85 5%
$10,001 to $20,000
$872,052
3,861
$226 3%
$20,001 to $30,000
$141,349
1,036
$136 1%
$30,001 to $40,000
$1,813
35
$52 0%
Total
$1,609,261
11,916
$135 9%
Married Joint
$0 to $10,000
$881,612
5,632
$157 4%
$10,001 to $20,000
$4,348,460
14,831
$293 11%
$20,001 to $30,000
$2,998,852
16,593
$181 12%
$30,001 to $40,000
$265,967
4,901
$54 4%
Total
$8,494,891
41,957
$202 30%
Head of Household
$0 to $10,000
$2,917,551
17,693
$165 13%
$10,001 to $20,000
$11,034,522
40,760
$271 29%
$20,001 to $30,000
$3,754,323
24,982
$150 18%
$30,001 to $40,000
$97,982
2,046
$48 1%
Total
$17,804,378
85,481
$208 61%
All returns
$0 to $10,000
$4,393,210
30,309
$145 22%
$10,001 to $20,000
$16,255,034
59,452
$273 43%
$20,001 to $30,000
$6,894,524
42,611
$162 31%
$30,001 to $40,000
$365,762
6,982
$52 5%
Total
$27,908,530 139,354
$200 100%
Source: TRD
Gross Receipts Tax Credit for Certain Hospitals. Under current law, for-profit hospitals
qualify for a 50 gross receipts tax deduction (Section 7-9-73.1 NMSA 1978). The bill effectively
reduces the gross receipts tax paid by for-profit hospitals from 50 percent of the normal state rate
to nothing once it is fully phased-in in FY10.
About half of New Mexico’s hospitals are for-profit. For-profit hospitals compete with non-
profit hospitals in New Mexico and hospitals in neighboring states that do not pay gross
receipts tax. The New Mexico Hospital Association reports that this bill will remove a
competitive disadvantage against New Mexico’s for-profit hospitals.
According to the NMHA, rural hospitals have no choice but to absorb the costs of
uncompensated care for patients who cannot pay. In addition, it is difficult for for-profit
pg_0009
Senate Bill 1156 – Page
9
hospitals to pass gross receipts tax on to consumers because Medicare will not reimburse for it.
DOH believes removing the gross receipts tax from for-profit hospitals will make them more
profitable and could allow them to provide enhanced services in New Mexico.
The proportion of for-profit hospitals has increased over last few years because for-profit
hospitals have more access to capital.
LFC notes that receipts of health practitioners have historically grown faster than receipts of
other industries. Removing receipts from high-growth sectors from the gross receipts tax base
makes it more difficult for tax revenue to keep pace with inflation.
PERFORMANCE IMPLICATIONS
Personal Income Tax Rate Reduction.
Active Duty Military Exemption.
Working Families Tax Credit.
Gross Receipts Tax Credit for Certain Hospitals.
ADMINISTRATIVE IMPLICATIONS
Personal Income Tax Rate Reduction. This change would require the Taxation and Revenue
Department to modify withholding tables and instructions for 2007 but otherwise should pose
little administrative burden.
Active Duty Military Exemption. Provisions of the proposed measure would impose relatively
minor administrative impacts on the Taxation and Revenue Department. Provisions of the
proposal could be administered with re-sources currently available to the Department.
Working Families Tax Credit. The Human Services Department reports that since the SB 1156
explicitly excludes credits from the calculation of modified gross income, a calculation used to
determine eligibility, there would be minimal impact on the programs HSD administers such as
food stamps or Medicaid.
Gross Receipts Tax Credit for Certain Hospitals. TRD reports they will experience moderate
administration impacts due to this bill. TRD will need to revise forms, educate taxpayers, train
personnel, modify audit processes, and manually process the credit.
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
Personal Income Tax Rate Reduction.
Active Duty Military Exemption.
Working Families Tax Credit.
Gross Receipts Tax Credit for Certain Hospitals.
TECHNICAL ISSUES
Personal Income Tax Rate Reduction.
pg_0010
Senate Bill 1156 – Page
10
Active Duty Military Exemption. According to the Department of Defense, “Active Duty"
refers to “Full-time duty in the active service of a Uniformed Service, including fulltime training
duty, annual training duty, and attendance while in the active service at a school designated as a
Military Service school by law or by the Secretary concerned." SB1156 refers to “active
service" which is presumed to mean “active duty" though clarification may be a necessary
correction.
TRD notes that, as written, the measure could be interpreted to include an exemption for federal
personal income tax obligations. It should be amended to clarify that it does not.
SB1156 does not distinguish between residents and non-residents.
Gross Receipts Tax Credit for Certain Hospitals. TRD notes the purpose of Section 1 of the
bill is unclear. It appears possible that the language was intended to clarify that TRD should
reduce the distributions to the general fund to prevent revenue impacts to local governments. If
that is the intention of the sponsors, TRD recommends amending Section 1 to state
“Distributions from the tax administration suspense fund to the state general fund of net revenue
attributable to the gross receipts tax ..." The Senate Corporations and Transportation Committee
amendment to the SB326 addressed this concern. It may be important to amend this bill in the
same way.
OTHER SUBSTANTIVE ISSUES
Active Duty Military Exemption. 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 $1,575 per claimant
mentioned above. The $1,575 in state tax savings would, for example, be reduced to $1,260
($1,575 x .8) for a taxpayer in the 20% federal tax bracket.
Working Families Tax Credit.
Gross Receipts Tax Credit for Certain Hospitals.
ALTERNATIVES
Personal Income Tax Rate Reduction.
Active Duty Military Exemption.
Working Families Tax Credit.
Gross Receipts Tax Credit for Certain Hospitals.
NF/nt