BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  3

DATE:  March 9, 2001	Submitted by: TAXATION AND REVENUE DEPT.       
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER:  SB-18 as amended by SCONC & SCORC

SPONSOR:  Senator Feldman

BILL SHORT TITLE:  Alternative Fuel Vehicle Motor Vehicle Excise Tax Exemption

CONFLICTS, DUPLICATES, COMPANIONS:  

DESCRIPTION:  This bill provides an exemption from the Motor Vehicle Excise Tax for alternative fuel vehicles during the period July 1, 2001 through December 31, 2007. The current preferential tax rate imposed on alternative fuel is resurrected, reinstating the phased tax rate schedule formerly in effect during 1996 through 2001 to be in effect during 2002 through 2007.  The maximum $0.12 per gallon tax rate on alternative fuel scheduled for January 2002 would be delayed until January 2008.

State agencies, currently required to purchase vehicles assembled in North America, would be allowed to purchase gas-electric hybrid vehicles assembled outside of North America until such time as North American gas-electric hybrids become available.  The existing law which requires “conversion” of state agency and educational institution vehicles to alternative fuel or bi-fuel would be revised to specify that 75% of vehicles acquired in fiscal year 2002 and subsequent years be capable of operating on alternative fuel or be gas-electric hybrid vehicles.  The exemptions from the alternative fuel requirements specified for state agency vehicle purchases are revised to specify a 15% fuel cost differential (current law specifies “approximately equivalent” fuel cost), to eliminate the current law references to fuel conversion, and to provide an exemption when a suitable alternative fuel vehicle is not available from an original equipment manufacturer.

The amendments mainly remove a proposal in the original to allow purchase of imported alternative fuel vehicles (other than gas-electric hybrids) and to re-shape the state program for acquiring such vehicles.

EFFECTIVE DATE:  January 1, 2002

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

Estimated Impact on Revenues	Recurring or		
			Nonrecurring	Funds	
	(FY 2001-2002)	(FY 2002-2003)	     Impact     	Affected	
	(small)	(500) to (2,000)	Recurring	State General Fund (MVX)	
	small	600 to 2,400	Recurring	State General Fund (GRT)	
	small	400 to 1,600	Recurring	Local general funds (GRT)	
	(100)	(160)	Recurring	State Road Fund (Alt Fuel)

The State Road Fund fiscal impact results from the decreased tax rate for alternative fuel (approximately $40 thousand attributable to purchases of annual permits and approximately $30 thousand per quarter attributable to fuel taxed on a per gallon basis).  The recurring fiscal loss to the State Road Fund would decline over time, reaching zero in fiscal year 2008-2009.

The State General Fund fiscal impact associated with foregone Motor Vehicle Excise Tax on alternative fuel vehicles is difficult to project.  In the near future the fiscal impact should not be large, since dedicated alternative fuel vehicles are finding limited consumer acceptance and gas-electric hybrid vehicles are not yet generally available.  Over the next few years, if gas-electric hybrid vehicles do become generally available, and particularly if a number of competing manufacturers offer such a vehicle, the fiscal impact could become substantial.

The positive impacts to the state and local general funds occur because the gross receipts receipts tax exemption for receipts from selling vehicles is conditioned upon payment of the motor vehicle excise tax. If the motor vehicle excise tax is not paid, then gross receipts tax on sales to nongovernmental buyers becomes due. Sales to governmental bodies, however, are not affected because a separate provision provides a deduction for receipts from selling tangible personal property to governments.

ADMINISTRATIVE IMPACT:  A moderate negative administrative impact on the Motor Vehicle Division would result from computer system changes required to establish time period specifications for the phased Alternative Fuel Tax rates, and establish procedures for exempting alternative fuel vehicles from Motor Vehicle Excise Tax during the titling process.  These changes can be accomplished with existing resources, but will present a significant opportunity cost to other initiatives and improvements to the division’s computer systems.

The requirement that state agencies purchase alternative fuel or gasoline/electric vehicles if is difficult to evaluate.  The cost of alternative fuel vehicles is undoubtedly significantly higher than traditional fuel vehicles and there is no incentive available to state agencies (who are exempt from the Motor Vehicle Excise Tax) to seek these higher-priced vehicles.

OTHER IMPACTS AND ISSUES:
•	While the fiscal impact associated with dedicated alternative fuel vehicles is not expected to be substantial, the fiscal impact associated with gas-electric hybrids may become quite substantial.  This illustrates an important issue which seems to be increasingly overlooked in tax policy considerations … it is usually not the tax incentive that drives the creation of something socially desirable, and if it proves to be a so-called “effective” tax incentive, the behavior probably would have occurred anyway, without the tax incentive.

Gas-electric hybrid vehicles may well prove to become the first alternative fuel vehicles acceptable to the general public.  It will not be any tax incentive which creates that acceptance, it will be development of the appropriate technology.  If this indeed is the case, now may not be the best time to offer a tax incentive for gas-electric hybrid vehicles.  Once the gas-electric hybrids become generally available, and a baseline is established as to their acceptance by the general public, then it may be appropriate to consider additional incentives.  At this time, however, any tax incentive for gas-electric hybrid vehicles will probably serve only as a windfall to those who would probably purchase the vehicles anyway.

•	The Motor Vehicle Excise Tax exemption for dedicated alternative fuel vehicles may be insufficient to promote widespread purchase of these vehicles by the public.  If one assumes a dedicated alternative fuel vehicle installed by the original manufacturer costs $400 to $800 more than a similar conventional fuel vehicle, in order for the difference to be offset by excise tax savings the taxable portion of the cost of the vehicle would have to be from $13,500 to $26,000 or more.  In many cases, the taxable portion of the cost (price less trade-in value) would not justify the increased cost attributable to alternative fuel equipment.

It is important to note the excise tax exemption is allowed only for “dedicated” alternative fuel vehicles or gas-electric hybrid vehicles.  Whereas an exemption for bi-fuel (gas-lpg) vehicles would be ripe for abuse and fraud (as was seen under Arizona’s law), the demand for “dedicated” alternative fuel vehicles may be limited by factors such as fuel availability (convenience) and uncertainty regarding fuel prices in the long run.

While the state tax on alternative fuel presents some minor additional cost savings over the life of the vehicle, it is uncertain whether total alternative fuel costs would be greater or less than traditional fuel, so there is little incentive presented by fuel costs over the long run.  The department has no information regarding mechanical maintenance cost differences between alternative fuel and traditional fuel vehicles.

Gas-electric hybrid vehicles are not yet generally available, so there should be no immediate impact associated with those types of vehicles.

•	The lack of alternative fuel infrastructure in the state (or in other states) is probably a significant impediment to widespread acceptance of dedicated alternative fuel vehicles.  How to effectively contribute to the development of such infrastructure presents a very difficult policy challenge.  Presumably the infrastructure should develop as demand for these fuels increases and some particular alternative fuel emerges as the “industry standard”. The demand may not develop, however, until some infrastructure is in place.

OTHER IMPACTS AND ISSUES (continued):

•	Current requirements that state agencies convert newly purchased vehicles to alternative fuel have probably been ineffective, despite the fact that the requirements have the strength of law.  In fiscal year 1993-1994, of the new vehicles purchased, 30% were supposed to be converted to alternative fuel.  In fiscal year 1994-1995 the requirement increased to 60%, and then to 100% for fiscal year 1995-1996.  This has not happened, and clearly the agencies do not believe the purchase of such vehicles is the best use of public funds.

•	Last year Arizona passed an extensive incentive for alternative fuel vehicles which, while being successful in stimulating alternative fuel (bi-fuel) vehicle purchases, resulted in almost catastrophic revenue losses and revealed a number of schemes designed to exploit the tax incentive which may not have been originally intended.  This bill does not provide any subsidy even approaching the Arizona law which created such turmoil and limits the tax exemption to “dedicated” alternative fuel vehicles (and the currently unavailable gas-electric hybrids), but neither is this bill expected to create a significant incentive for the purchase of alternative fuel vehicles.  The problem of creating an effective incentive without severe unintended consequences is a very difficult one.

•	The tax rate on gasoline is $0.17 per gallon and the tax on “special fuel” (mostly diesel) is $0.18 per gallon.  For each gallon of alternative fuel distributed in New Mexico, the tax imposed would be:

Period Beginning	Period Ending	Alternative Fuel Tax Imposed	
January 1, 2002	December 31, 2003	$0.03 per gallon	
January 1, 2004	December 31, 2005	$0.06 per gallon	
January 1, 2006	December 31, 2007	$0.09 per gallon	
January 1, 2008	Thereafter	$0.12 per gallon	

The annual alternative fuel tax permit, in lieu of the tax on each gallon of alternative fuel, would be: 

Period Beginning	Period Ending	Gross Vehicle Weight	Annual Alt. Fuel Tax Imposed	
January 1, 2002	December 31, 2003			
		0 to 6,000 pounds	$15.00	
		6001 to 16,000 pounds	$25.00	
		16,001 to 26,000 pounds	$75.00	
		26,001 to 40,000 pounds	$175.00	
		40,001 to 54,000 pounds	$275.00	

The cost of alternative fuel permits would increase in subsequent years on a schedule similar to the increase in the tax per gallon shown above.