** REVISED **	BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE: February 22, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY 
BILL NUMBER:  HB-382

SPONSOR: Representative Vanderstar Russell

BILL SHORT TITLE: Annuity & Pension Income Tax Exemption

CONFLICTS, DUPLICATES, COMPANIONS:  SB-700

DESCRIPTION:  This bill proposes an exemption from state income tax for pension or annuity income of up to $3,000 for an individual.  Pension or annuity income would be defined as income required to be reported on "form 1099-R or any successor form used to report distributions from pensions, annuities, retirement or profit-sharing plans, individual retirement accounts, insurance contracts and similar income that is attributable to any benefit taxable for federal income tax purposes paid to an individual under a qualified plan, annuity or simplified employee pension plan pursuant to Sections 401 through 404, 408 or 457 of the Internal Revenue Code of 1986 and including any inside buildup of interest distributed in conjunction with any of the listed distributions."

EFFECTIVE DATE:   Not specified – assume 90 days following adjournment (about June 15, 2001). 
			Applicable to tax year 2001 and subsequent years.

FISCAL IMPACT (Thousands of dollars)    Brackets indicate a revenue loss:
	Estimated Impact on Revenues	Recurring or		
			Nonrecurring	Funds 	
	 FY 2001-2002 	 Full Year 	     Impact     	         Affected         	
	(27,900)	(31,000)	Recurring	State General Fund	

The fiscal impact estimate is based on 1998 Statistics of Income data for New Mexico filers published by the Internal Revenue Service, and marginal tax rate information calculated by the department.  It was assumed there is little overlap between those receiving pension and annuity income (128,411 returns in 1998) and those receiving IRA distribution income (41,200 returns in 1998).  The 169,611 total returns in 1998 was grown by 2% per year, resulting in about 180,000 returns in 2001. 

On average, each pension recipient with taxable income would realize state tax savings of from $100 to $246, with the majority of filers saving about $100 to $216 in annual state income taxes.  Since state income taxes are deductible for federal tax purposes, taxpayers who itemize deductions will receive a net benefit from this exemption of approximately 60 to 85 percent of the decrease in state tax.  Federal tax for those taxpayers may increase by $15 to $88 per pensioner.

TECHNICAL ISSUES:
•	The Department will be unable to differentiate between particular types of 1099-R income during tax return processing, and unable to determine the taxable portions of 1099-R income included in federal adjusted gross income in some cases.  Thus portions of income already exempt from tax could be deducted a second time, and additional income, not intended to be exempt, may possibly be excluded from state income taxation. Form 1099-R does not always show the taxable portion of retirement income.  Verification would have to be manual.

ADMINISTRATIVE IMPACT:	  Department			Additional
					Cost (thousands)		  F.T.E.  
					 $ 40 to $ 60			   Temps

Administrative impact on the Department would be substantial. Revision to tax forms and instructions, and data processing systems, and additional temporary employees would cost between $40 and $60 thousand. A perhaps substantial reformatting of the forms may be needed to capture relevant information.  Additional temporary employees would be required to identify and verify 1099-R income, and handle exception processing and increased refund processing.  Without additional personnel for the manual verification process and refund handling, the processing of all personal income tax returns would slow, probably extending the personal income tax processing season and possibly increased interest paid on refunds.

An increase in taxpayer errors resulting from confusion or misinterpretation of the distinction between total pension income and the taxable portions would be expected.  Verification of exemption claims might be done through federal tax data matches following the normal tax filing season, however there is a considerable time lag before federal data matches can be run.  Taxpayers who are assessed for a two year old mistake are, understandably, unhappy about paying two years worth of interest charges.  Additionally, some difficulties may be expected determining which types and which portions of 1099-R income are exempt, and which are subject to income tax, so some number of inappropriate assessments could also be expected. 

OTHER IMPACTS AND ISSUES: 
1.	The exemption will probably affect about 180,000 tax returns with current liability for an average taxpayer benefit of about $173 per return.  The average benefit at the median adjusted gross income level for pensioners would be about $216 per return.   A maximum benefit of $246 per pensioner (possibly $492 on a married filing joint return) will apply to high-income retirees. A significant portion, perhaps about 70 percent of the impact results from tax decreases for taxpayers under age 65, since those over age 65 already benefit significantly from the state's existing deduction for taxpayers over age 65.

2.	The taxable portion of retirement income under existing qualified plans was not taxed in the years in which the contribution was made.  With this proposed exemption, $3,000 per year per pensioner would never be subject to income tax.

3.	In tax year 1992, 117,000 tax returns reported taxable pension/annuity and IRA income of $1.33 billion.  Those returns showed an adjusted gross income of almost $4.1 billion and wage/salary income of $1.9 billion. By 1998, pension and IRA distribution income had grown to $2.37 billion.

4.	This exemption will apply to anyone receiving a pension regardless of income level.  Targeting tax relief to persons based on income level may be a more equitable and cost effective mechanism than targeting relief based on the persons' source of income.  From a tax policy point of view, there is little justification to treat different sources of net income differently, particularly at the expense of some more general tax reduction proposal.