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F I S C A L I M P A C T R E P O R T
SPONSOR Jennings
ORIGINAL DATE
LAST UPDATED
2/28/07
HB
SHORT TITLE Income Tax Reductions and Rebates
SB 1185
ANALYST Francis
APPROPRIATION (dollars in thousands)
Appropriation
Recurring
or Non-Rec
Fund
Affected
FY07
FY08
299,690.0
Nonrecurring
General Fund
(Parenthesis ( ) Indicate Expenditure Decreases)
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY07
FY08
FY09
(209,200.0)
(109,300.0)
Nonrecurring General Fund
(27,900.0)
(29,100.0) Recurring General Fund
(Parenthesis ( ) Indicate Revenue Decreases)
SOURCES OF INFORMATION
LFC Files
Responses Received From
Taxation and Revenue Department (for similar bills)
SUMMARY
Synopsis of Bill
Senate Bill 1185 combines several revenue related changes with capital outlay appropriations.
SUMMARY:
•
Decreases personal income tax rate for top income bracket to 4.9 percent.
•
Enacts a Working Families Tax Credit (WFTC) that is 10 percent of the Federal Earned
Income Credit (EIC).
o
Redefines modified gross income to exclude credits
o
Disallows low-income comprehensive tax credit (LICTR) if WFTC claimed
•
Provides a tax rebate of $138 per exemption claimed to all NM resident taxpayers
pg_0002
Senate Bill 1185 – Page
2
o
Exempts the rebate from state tax
o
Inmates and non residents excluded
•
Appropriates $300 million for capital outlay projects
Personal Income Tax Rate Reduction. This section accelerates the current phase-in of the per-
sonal 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.
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%
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 li-
ability, the excess is refunded to the taxpayer. SB 1185 also amends the low-income compre-
hensive tax rebate (LICTR) to make a taxpayer ineligible for LICTR if the taxpayer receives the
WFTC. SB 1185 also explicitly excludes credits provided in the Income Tax Act from the calcu-
lation of modified gross income. The effective date is January 1, 2007.
Personal Income Tax Rebate. Senate Bill 1185 creates a personal income tax rebate for all NM
residents who filed a tax return in 2006 who are not dependents of another taxpayer and who are
residents on the last day of 2006 or for NM residents who file a tax return in 2007 provided they
are a resident on the last day of 2007. The rebate amount is $138 per exemption declared for
federal income tax purposes. For those taxpayers who filed a return in 2006, the rebate is an ad-
vanced rebate that will be issued no later than June 30, 2007. For those taxpayers who did file a
return in 2007 and did not receive an advance payment, the rebate can be claimed on the 2007
tax return. Either way, the rebate is exempt from NM personal income taxes.
FISCAL IMPLICATIONS
SUMMARY OF FISCAL IMPACTS (ALL GENERAL FUND)
($M)
FY07 FY08
FY09
Accelerate PIT
(19.8) (46.2)
Working Families Tax Credit
(27.9) (29.1)
Tax Rebate
(189.4) (63.1)
Recurring Revenue Changes
- (27.9) (29.1)
Nonrecurring Revenue Changes
(209.2) (109.3) -
Capital Outlay
300.0
pg_0003
Senate Bill 1185 – Page
3
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
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 es-
timates of recurring general fund revenues, the reduction is only for these two fiscal years and
does not recur in the future.
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 as-
sumed 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 gen-
eral 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
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 sched-
ule 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.
pg_0004
Senate Bill 1185 – Page
4
Table 1: Proposed Rate Schedule
Taxable Income
Married Filing
Jointly, Surviv-
ing Spouses,
Head of House-
hold
Married Fil-
ing 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 tax-
able 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 of-
fer 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 allow-
ing 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 Quali-
fying 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
pg_0005
Senate Bill 1185 – Page
5
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 Quali-
fying Children Eligible.
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
)
For a single or married taxpayer with no children, the cut-off for benefits is very low but for tax-
payers 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.
pg_0006
Senate Bill 1185 – Page
6
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 an-
other 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 perma-
nently 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.
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_0007
Senate Bill 1185 – Page
7
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
Personal Income Tax Rebate. SB1185 sets up a rebate similar to the one issued in 2005 by leg-
islation enacted following the 2005 special session. Whereas that rebate had varying amounts
depending on income and number of exemptions, this rebate is $138 per exemption regardless of
income. The rebate will reduce personal income tax revenues which flow to the general fund by
$243 million.
Assuming that 25 percent growth in tax returns based on the growth from 2004 to 2005, it is es-
timated that $243 million will be included in the advanced payments and $40 million will be
claimed on the 2007 tax return in FY08. Over sixty percent of the rebates would go to those with
less than $35,000 in adjusted gross income. The average rebate per taxpayer is $284.
pg_0008
Senate Bill 1185 – Page
8
Table 1: Average Rebate by Income
Share Average Rebate Average Exemptions
0 to 10,000
17% $ 192.9 1.40
10,001 - 20,000
22% 282.8 2.05
20,001 - 35,000
22% 304.3 2.20
35,001 - 50,000
11% 319.6 2.32
50,001 - 100,000
22% 358.5 2.60
100,001 +
6% 379.4 2.75
All Taxpayers 284.1 2.06
LFC has calculated the impact at $243 million using the number of exemptions from the
2005 tax return data and adjusting it for dependents. TRD has estimated the impact $43
million lower at $207 million using information from the 2005 rebate.
Capital Outlay:
AGENCY
REASON
AMOUNT
Administrative Office of the
Courts
Court of Appeals Building in Bernalillo
8.000
Equipment for courtrooms, including security and interpreting
equipment
4.000
Aging and Long Term Ser-
vices
Equipment, vehicles and renovation to senior citizen centers
statewide
8.200
Border Authority
Streets and drainage in Columbus port of entry
0.600
Drainage study at Columbus port of entry
0.100
Commission for the Blind Roof replacement/fire protection sprinklers
0.935
Corrections Department Kitchen at Camino Nuevo facility
1.000
Cultural Affairs Department Renovations/repairs to museums and monuments
5.000
Construction completion of Hispanic Cultural Center
1.300
Phase I construction of archaeology center in Santa Fe
1.800
Upgrades/expansions to museum of space history in Alamo-
gordo
1.200
Complete phase I and II of the main gallery for farm and ranch
heritage museum in Las Cruces
4.000
Renovate Girard wing of International Folk Art Museum in
Santa Fe
0.900
Art collection/museum resources equipment including van of
enchantment
0.750
Cumbres & Toltec
Locomotive/track improvements
2.000
Economic Development De-
partment
Redevelopment of central business districts
2.000
Utilities at Wood Cluster park in Las Vegas
0.500
pg_0009
Senate Bill 1185 – Page
9
AGENCY
REASON
AMOUNT
Public Education Department Pre-K classrooms
3.000
Laptop computers for 7th graders
1.500
Library Books
2.000
IT infrastructure
10.000
Office of State Engineer Surface water measurement - Rio Gallinas/Rio Chama
3.000
Energy Minerals and Natural
Resources Department
Fire trucks and carriers
0.500
Park improvements
2.500
Department of Finance and
Administration
Affordable housing
8.000
Tribal water/wastewater and other infrastructure/economic de-
velopment
7.000
Home weatherization
2.000
Game/Fish
Lake Roberts and Burns Canyon dam repairs
3.300
Local Government Division Public health facility renovation in Socorro
0.500
Public health facility renovation in Gallup
0.500
Public health facility renovation in Espanola
2.500
State Armory
Maintenance and renovations including Rio Rancho training
center
3.000
Property Control Division State laboratory
21.000
Department of Public Safety Vehicle maintenance and replacement
1.500
Public School Capital Outlay Local share for charter schools
10.000
New/expanded facilities in high growth areas
40.000
Supplemental funding to address adequacy
10.000
Public Regulation Commis-
sion
Firefighters training academy
0.535
State Fair
Various projects
10.000
Supreme Court Building
Commission
Fire suppression and ADA compliance
1.000
Tourism
Gallup and Glen Rio visitor centers
0.750
Wastewater Facility Con-
struction Loan Fund
Various projects
1.500
Capital Program Fund
Border authority office
0.300
Renovations to youth diagnostic development center
4.000
pg_0010
Senate Bill 1185 – Page
10
AGENCY
REASON
AMOUNT
Gym, weight room and vocational classrooms at juvenile facil-
ity in Dona Ana
5.000
Upgrades to Eagle Nest reintegration center
0.500
Upgrades to Camp Sierra Blanca
0.500
Security upgrades at state-owned correctional facilities
6.000
Repairs/maintenance of state-owned correctional facilities
5.000
Renovations at Fort Stanton
0.500
Purchase/installation of printing equipment for state printing
office
0.500
Purchase of Coughlin Building in Santa Fe
1.500
Emergency repairs to state buildings
2.000
HVAC upgrades to state buildings including Simms Building
6.000
Structural/programmatic analysis of Department of Health fa-
cilities
0.500
Medical and dental unit at Sequoyah facility
0.900
Analytical equipment for scientific laboratory
1.300
Alzheimer's unit at NM Veterans' home in T or C
1.800
Improvements to state health facilities
6.000
Epi Duran building in Las Vegas renovations
0.300
Repairs/maintenance of offices in Alamogordo, TIWA building
in Albuquerque and Las Cruces facility
1.500
State police district office in Las Cruces
5.000
State police district office in Las Vegas
5.000
Port of entry in Lordsburg
12.000
IT mitigation and facility renovations
1.000
State crime laboratory
1.700
Remittance transport replacement and security upgrades at
Lujan building
0.600
NM School for the Blind Early childhood center
6.000
NM School for the Deaf Renovate Connor Hall and dining hall
6.700
UNM
Patient care equipment for UNMH and cancer treatment center
5.000
Breast cancer research
3.215
pg_0011
Senate Bill 1185 – Page
11
AGENCY
REASON
AMOUNT
Center for isotopes in medicine
3.500
SUB TOTAL
281.685
Contingent Appropriations
Indian Water Rights Settle-
ment Fund
Aamodt settlement
12.000
Pecos River Compact
Purchase land/water rights and development of augmentation
well fields
3.000
Purchase land/water rights and development of augmentation
well fields
3.000
SUB TOTAL
18.000
GRAND TOTAL
299.69
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
SB 265 is a similar bill that cuts the personal income tax rate to 4.9 percent.
SB 317 as amended is a similar bill that enacts a WFTC but allows LICTR recipients to claim the
WFTC and the percentage of the EIC is 7.5 percent.
SB812 is a similar bill that provides a tax rebate.
Capital outlay included in this bill will likely be similar to other legislation and the executive
recommendations.
NF/mt