BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 24, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: HB-470 as amended by House Business & Industry Committee

SPONSOR: Representative Hobbs

BILL SHORT TITLE: Technology Startup Tax Credit

CONFLICTS, DUPLICATES, COMPANIONS: The existing technology jobs credit is a related program. SB-288 is identical.

DESCRIPTION: The Technology Startup Tax Incentive Act provides a credit equal to GRT, compensating, or withholding tax paid for as many as five consecutive years. To qualify a business must:
1.    Spend at least 20% of total revenue on R and D.
2.    Employ fewer than 50 persons on an FTE basis
3.    Have fiscal year revenue of $10 million or less

Excluded from the credit are expenditures made as part of an Industrial Revenue Bond (IRB) project and expenditures for which other tax incentives, such as the Investment Credit, are taken.

A qualified business must be is a corporation, partnership,  LLC or, by HBIC amendment, a sole proprietorships. The taxpayer may claim credits for five years, dating from the first claim. Any business in the state with fewer than 50 employees and total revenue not exceeding $10M which invests in substantial R & D may qualify, for a period of five years. The long-term impact may be adequately described by the bill title, but the short term impact may be quite different.

Firms that sell stock in an IPO or takeover are disqualified from the sale date forward.

EFFECTIVE DATE: July 1, 2001

FISCAL IMPACT (Thousands of dollars):  		Note: Parenthesis ( ) indicate a revenue loss:

		Recurring or		
	Estimated Impact on Revenues	Nonrecurring	Funds 	
	  FY 2002 	  Full Year r   	     Impact     t     	             Affected         .             	
	(1,200)*	(1,300)*	Recurring	General Fund	

ADMINISTRATIVE IMPACT  (Thousands of Dollars): forms, instructions and taxpayer seminar material. Addressing some of the issues identified under “TECHNICAL ISSUES” may prove time-consuming.

TECHNICAL ISSUES:
1.	The credit is equal to any… taxes due to the state paid or payable by the taxpayer.  If a business hasn't paid its taxes for 3 years, and then it manages to qualify for the credit, will its tax liabilities for the past 3 years be wiped out? Deleting “or payable” could be an administrative and fiscal hardship on the taxpayer. If taken literally, the taxpayer would have to pay one month, apply for a credit for the amount paid, and after approval apply that credit against a future liability. 

2.	The credit exclusion should also include the job mentorship credit. If it is not made permanent as requested in HB-67, then no harm will be done. If not included and HB-67 is enacted, a few businesses could achieve more than 100% credits.

3.	The credit could also be perpetual as long as the firm remained small -- which would be easy to do by creating subsidiaries who then apply for their own credits.  There is nothing in this proposal which bars an R & D firm from changing legal form every five years to renew its eligibility.

OTHER IMPACTS AND ISSUES:
1.	New Mexico has over 110 research and development companies that employ fewer than 50 employees. Few, if any, of these firms have revenue in excess of $10 million.  Most of the R and D firms with significant gross receipts and fewer than 50 employees are able to deduct a large percentage of gross receipts. Thus they pay very little gross receipts or compensating tax. Withholding amounts tend to be small for most of these firms as well.
2.	As previously mentioned, the bill does not require that the business be newly formed or new to New Mexico. Many existing technology firms would qualify for the technology start up credit, although Sandia National Laboratories would not.
3.	This credit is intended to address the competition from many neighboring states which have R and D tax incentives and/or exempt services from sales and use tax. Most of these credits, however, are similar to last year’s Technology Jobs Credit. This tax holiday proposal is apparently unique.
4.	Although a credit of this sort might encourage some contract R & D firm start ups in New Mexico, most of the tax expenditure will benefit existing businesses that may require no additional incentive to operate and expand in New Mexico. These expenditures will stimulate the New Mexico economy only to the extent that businesses use their tax savings to purchase capital or labor from New Mexico suppliers.
5.	The eligibility requirement that businesses employ 50 or fewer employees will have little effect on employment for growing firms with close to 50 employees. 
6.	The abrupt loss of credits as the firm crosses 50 employees may be a problem.