BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  3

DATE:  March  15, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SB –541 as amended on Senate Floor and HTRC

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 similar in concept.

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 per HTRC amendments  are summarized in a matrix below under “OTHER ISSUES AND IMPACTS”. After a few years, the general treatment is that a new business is permitted a two-year qualification, followed by the requirement that payroll for New Mexico residents increase by 10% over the previous year. Qualification is based on first month of the current year for new and existing businesses compared to previous year’s first month payroll. (See “TECHNICAL ISSUES AND IMPACTS”)

EFFECTIVE DATE: applicable for tax years beginning on or after January 1, 2002.

FISCAL IMPACT (Thousands of dollars):  		Note: Parenthesis ( ) indicate a revenue loss:
		Recurring or		
Estimated Impact on Revenues	Nonrecurring	Funds 	
FY 2002	 FY 2003 	Full Year	     Impact     t     	             Affected          .             	
(150)	(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. Although the HTRC proposed amendments clarify the concept, they do not materially decrease the general fund exposure. There may be a small FY 2002 impact if the companies that qualify for FY 2002 begin in February 2002 honor a declaration from qualified Texas employees to no longer withhold New Mexico income taxes for the whole of 2002. One other issue sustaining this somewhat higher fiscal impact is that it is likely that the 20-mile limit to this treatment will fall under a constitutional challenge – see TECHNICAL ISSUES: #1 below. This would open up the treatment to all Texans working in New Mexico plants, provided the companies’ payrolls qualify per the matrix below. 

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 may violate the constitutional prohibition on local or special legislation (Article IV, Section 24). Thus, other Texans working in New Mexico plants outside the 20 mile limit may protest the imposition of New Mexico withholding on their wages. The successive qualifications detailed in the matrix below would probably hold, but the 20 mile limit is likely to be overturned.

2.	Qualification (ii) should read, “and the first monthly payroll of the new calendar year”. 

3.	While it is unlikely that companies will abuse the fairly loose qualifications (10% increase year over year in payroll for New Mexico residents), the Department will promulgate regulations that the payroll for New Mexicans may not drop below the point where the 10% annual increase is violated for more than a two-month period during the year after the qualification test is met in January. This will mean that companies that have a 26 paycheck year will not be unduly penalized for this election, but that companies that manipulate payroll during January will be held not to qualify. These regulations will also make clear that a three paycheck month in the previous year will be compared to a two paycheck January plus the first paycheck in February. The Department will attempt to be as fair as possible, subject to the intent of the legislature, while ensuring that there is no abuse.

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 also 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.

5.	This bill as amended does put pressure on Texas managers of multinational companies that take advantage of this tax break for Texans to hire New Mexicans and give New Mexican employees raises up to 10% more each year. On the other hand, it also provides a significant incentive to hold total New Mexico payroll to 10% increase year over year and to “bank” the earned but unpaid wage increase for the next year when the combination of new hires and natural wage increases do not quite provide the 10% increase.

6.	MATRIX of affect:

	Criterion	Paragraph Reference	Notes	
New firm in state, begins after January 1, 2001 but before January 2, 2002.	No payroll in NM in 2001.	(i)	Qualifies for all of 2002	
    This firm, TY 2003	No payroll prior to January 1, 2001, but payroll for all of 2002	(iv)	Qualifies for all of 2003 if if first payroll of 2003 for New Mexico residents exceeds by 10% the payroll the payroll for New Mexico residents for January 2002.	
    This firm, TY 2004	No payroll prior to January 1, 2001, but payroll for all 2003	(iii)	Qualifies for all of 2004 if first payroll of 2004 for New Mexico residents exceeds by 10% the payroll for all employees in January 2001, and the payroll for New Mexico residents for January 2003.	
New firm, begin after January 2, 2002	No payroll in NM in 2001	(i)	Qualifies for all of 2002	
     This firm, TY 2003	Payroll in NM for less than all of 2002.	(ii)	Qualifies for all of 2003 if first monthly payroll of 2003 to New Mexico residents exceeds the highest monthly payroll of 2002 for New Mexico residents.	
     This firm, TY 2004	No payroll prior to January 1, 2001 but payroll for all 2003.	(iii)	Qualifies for all of 2004 if first payroll of 2004 for New Mexico residents exceeds by 10% the payroll for all employees in January 2001, and the payroll for New Mexico residents for January 2003.	
New firm begin in 2003	No payroll in NM in 2002.	(i)	Qualifies for all of 2003	
      This firm, TY 2004	Payroll in NM for less than all of 2003.	(ii)	Qualifies for all of 2004 if first monthly payroll of 2004 to New Mexico residents exceeds the highest monthly payroll of 2003 for New Mexico residents.	
Existing firm, TY 2002	Payroll for all 2001.	(iii)	Qualifies for all of 2002 if first payroll of 2002 for New Mexico residents exceeds by 10% the payroll for all employees in January 2001, and the payroll for New Mexico residents for January 2001.	
    This firm, TY 2003	Payroll for all 2002	(iii)	Qualifies for all of 2003 if first payroll of 2003 for New Mexico residents exceeds by 10% the payroll for all employees in January 2001, and the payroll for New Mexico residents for January 2002.	
    This firm, TY 2004	Payroll for all 2003	(iii)	Qualifies for all of 2004 if first payroll of 2004 for New Mexico residents exceeds by 10% the payroll for all employees in January 2001, and the payroll for New Mexico residents for January 2003.