BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  March 7, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SB –541 as amended on Senate Floor

SPONSOR: Senator Nava

BILL SHORT TITLE: Personal Income Tax Exclusion for Employees of Manufacturing Plants Located Within 20 Miles of an International Border.

CONFLICTS, DUPLICATES, COMPANIONS: HB – 784 as amended by House Business and Industry Committee is identical.

DESCRIPTION: This bill allows employees of a manufacturing plant located in the state but near the border with Mexico to apportion their income to their resident state. If a new plant were built in Santa Teresa, for example, employees from Texas would be permitted through the action of this bill, to apportion all their wages and salaries to Texas, which does not have a personal income tax. Further qualifications are that employment of New Mexico residents be at least 10% greater in the tax year than in the previous year or that the firm hire New Mexico residents for its first year of operation in the state. Further, a business must employ at least five full-time employees in New Mexico. Senate floor amendment extends the zone to 20 miles and clarified one technical issue.

EFFECTIVE DATE: applicable for tax years beginning on or after January 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	     Impact     t     	             Affected          .             	
	(500)	(1,000)	Recurring*	General Fund	

The loss of revenue under this bill is estimated at $1,200 per Texas employee per year employed at a manufacturing plant in Santa Teresa that meets all the requirements of this bill. This assumes $700 per week as the average weekly wage (this is the New Mexico average weekly wage for manufacturing employment) and a 3.3% average tax rate. Because this bill sets up something like a tax-free zone for Texans, Texas companies locating in New Mexico can take advantage of New Mexico’s low property tax rates and Texas’ zero personal income tax rate. This should quickly run up the income tax cost. This should be considered quasi-nonrecurring because each individual firm is likely to be eligible for only a few years. There is “upside risk” to this proposal. A major plant relocation, construction or expansion, involving hundreds or even thousands of employees could cost the general fund well in excess of $1 million a year..

ADMINISTRATIVE IMPACT: minimal. Forms and instructions must reflect the provisions of this bill, but there is no systems or processing impact.

TECHNICAL ISSUES: 
1.	This bill is so specific, it has the mark of special legislation needed to recruit one firm to New Mexico. Thus, it may violate the constitutional prohibition on local or special legislation (Article IV, Section 24). 

OTHER IMPACTS AND ISSUES:
1.	This bill sets up something of a cruel promise for employees. The year a company moves to New Mexico, the Texas employees that came with the plant relocation would clearly qualify for tax breaks. The second year, the Texas employees would probably qualify in avoiding New Mexico income tax. In subsequent years, unless the company grows by at least 10% in payroll per year and all new hires are New Mexico residents, the Texas employees would lose the privilege of apportioning income to Texas. The presence or absence of deduction will be known on the first day of the company’s tax year, allowing timely application of New Mexico personal income tax withholding.

2.	This bill sets a precedent for exempting the wages of non-New Mexicans who work here.  If this bill is enacted, eventually all of the other non-New Mexicans will be covered.  Why is this good policy?

3.	A general rule about applying taxes to non-residents is that the tax-imposing state may not treat non-residents more severely than residents.  If a state wants to discriminate against its own citizens, federal jurisprudence won’t stand in its way. 

4.	This is a somewhat unusual proposal. The tax incentives used here to recruit companies and jobs to New Mexico have been transparent to the workers employed in the plant.  This proposal, however, brings the economic development game to the factory floor. Two workers, working side by side in a manufacturing plant in Santa Teresa will have take home pay that differs by an average $23 a week, based on home residency. There will be a natural resentment that the Texas worker is not supporting New Mexico’s school kids. It is an interesting concept.