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 Campos

ORIGINAL DATE

LAST UPDATED

1/22/08

2/09/08 HB 111

SHORT TITLE Municipal Income Tax Distribution

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

($9,077.0)

($17,040.0) Recurring General Fund

$9,077.0

$17,040.0 Recurring

Local

Governments

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

New Mexico Municipal League

Taxation and Revenue Department (TRD)

Department of Finance and Administration (DFA)

SUMMARY

Synopsis of Bill

House Bill 111 amends the Tax Administration Act to allow for an alternative distribution to the

state shared gross receipts tax (GRT) revenue. Current law requires the state to share 1.225

percent of the state’s share of GRT with municipalities. This bill would change that share to one

percent of state GRT plus the greater of 0.225 percent multiplied by a municipality’s tax rate

multiplied by the net receipts generated within and by the municipality or 1/12

th

of 0.275 percent

of adjusted gross income reported two years prior to any distribution.

Each month the two values would be compared and the higher would be the distribution. The

provisions intended to hold municipalities harmless for the food and medical deduction would

reflect whether the GRT or income based calculation.

The bill also requires the department of finance and administration (DFA), taxation and revenue

department (TRD) and the New Mexico Municipal League (NMML) to report annually to the

House Bill 111 – Page

2

revenue stabilization and tax policy committee on the distributions and any recommendations for

changes in the distribution formula or revenue sources. Additionally, TRD must develop a

method of determining the accurate residence of income tax payers in calendar year 2009.

HB111 provisions would be effective January 1, 2009. Because of modified accrual, the new

distribution will include business activity in November and December of 2008.

FISCAL IMPLICATIONS

TRD estimated that the impact will be a $17.0 million reduction in general fund revenue in

calendar year 2008 and grow 5 percent each year, all of which will be redistributed to

municipalities. Since the effective date is January 1, 2009, eight months of a full year impact is

accrued to FY09. The impact is estimated using current zip codes from personal income tax

returns.

SIGNIFICANT ISSUES

The intent is to diversify revenues for the municipality and capture some portion of economic

activity that the municipalities “export" to other municipalities. There are two main

beneficiaries: very small rural municipalities that do not have the economic base to raise GRT

revenues and municipalities near a large commercial center.

TRD also reports that, due to the way the food and medical hold harmless is addressed in the bill,

some municipalities may actually have a lower distribution than what is expected in CY08:

The NM Municipal League, an association that represents the state’s municipalities, reports that

the municipalities are too dependent on gross receipts tax for general purpose revenue and suffer

during recessions. Including a distribution on personal income taxes, according to NMML,

would diversify municipal revenues. TRD concurs that “if a municipality receives a distribution

based on AGI their revenue would be much more stable over a calendar year than under current

law; however, especially for small towns AGI can sometimes vary considerably from year to

year. Currently municipalities can individually decide to make their revenues more stable

through higher property taxes, or make their revenues higher through additional local option

gross receipts taxes."

ADMINISTRATIVE IMPLICATIONS

TRD:

Distribution schedules, processing, and reports would change. To accurately determine the

site of residence the PIT forms would need to change; this cannot be done for the tax year

2007. Although the proposal authorizes the Department to come up with an alternative

means of determining local distribution in 2009, the lack of accurate residence information

will make it difficult for the Department to do so. The costs could be minimal or extensive

based on the accuracy demanded determining municipal distributions.

TECHNICAL ISSUES

TRD:

The requirements in this proposal will increase the filling complexity for all New

House Bill 111 – Page

3

Mexicans filing a personal income tax return. If a taxpayer moves their income must be

apportioned between one or more residences. If spouses live apart in a tax year or a

portion of one then their income must be apportioned between residences.

Taxpayers who recognize losses in a given year often report negative figures for adjusted

gross income. In tax year 2004, total adjusted gross income in one municipality –

Causey-- summed to a negative amount. The proposal should probably be amended to

specify that AGI totals on which the proposed distributions would be based would

exclude returns which report negative AGI. The fiscal impact estimates shown above are

based on this presumption.

The proposal does not specify what revenue source TRD is to use in making the required

distribution. The bill should specify the intended source. Distributions based on AGI

would presumably be from individual income tax revenues. The largest component of

income tax payments is made through the Withholding Tax. This would be an

appropriate source for the proposed distributions.

NF/bb:nt