BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 20, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SB - 739

SPONSOR: Senator Adair

BILL SHORT TITLE: Tax Incentives for Construction and Operation of an Electrical Generating Plant in Lea, Eddy or Chavez Counties.

DESCRIPTION: This bill “sweetens” the pot for an investor owned utility, working in concert with a sponsoring government entity, that builds and operates an electrical generating plant in Lea, Eddy or Chavez Counties financed with industrial revenue bonds. The tax incentives included in the bill include: (1) any electrical generating plant built will be considered a manufacturing plant for the purpose of double-weighted sales factor for corporate income tax; (2) specifically exempts from gross receipts tax the tangible personal property, including that required for construction of the plant, incorporated in an electricity generating facility financed by industrial revenue bonds; (3) a technical extension of the use of NTTCs for construction tangibles, since the tangible property is not subsequently taxable; and (4) this project is eligible for the manufacturer’s investment credit of 5% of the non-construction tangible personal property included in the plant.

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	     Impact     t     	             Affected          .             	
	(Millions)	(Millions)	Recurring	General Fund	
	(Millions)	(Millions)	Recurring	Local Governments	

	Assuming a 1,000 MW facility were built, total plant cost would be in the neighborhood of $300 million. The gross receipts tax deduction on construction tangible would be about $5 million (mostly state cost), and the investment credit would be about $5 million (all state cost). These tax incentives would be worth about 3% of the cost of the plant. The property tax exemption – the plant would be “owned” for the purpose of property tax by the county – might be worth on the order of $1.5 million a year.
	The precedential impact of this bill, however, is much more substantial.  The first obvious extension is to all power plants.  A less apparent but potentially larger impact will come from the reaction of the federal government.  New Mexico has been successful, even in the U.S. Supreme Court, in defending the imposition of its gross receipts tax on government contractors because it treats those contractors no differently than other contractors.  Enactment of this bill will mean that government construction contractors are being treated less favorably than other contractors.  It is not unlikely that federal courts would find an impermissible discrimination and bar New Mexico from taxing any federal construction contract.  On an annual basis, that is something like $9 million in state and local gross receipts tax.  If federal contractors become exempt, how long will the state continue to tax its own projects and those of local governments?
	There are additional exposures, assuming that any portion of the bill were held to violate the Constitution. For example, the Four Corners Power Plant and San Juan Generating Stations which sell substantial amounts of power outside the state might attempt to claim the benefits of double-weighted sales for corporate income tax purposes.

ADMINISTRATIVE IMPACT: Since this is designed to be effective for one and only one company and plant, virtually all the regulatory and processing issues could be handled manually, with minimal expenditure of resource. The true cost, however, would be defending against the lawsuit sure to be brought against the state seeking to extend the benefits of this bill to a large number of other projects and circumstances. To have any hope of prevailing in these lawsuits, the Department will have to engage top-flight outside counsel. Litigation expenses incurred in defending these cases could easily exceed $1,000,000.

TECHNICAL ISSUES:
1.	Sections 2 and 3 of the bill appear to be unnecessary.  Nothing in this proposal changes the taxability of construction –a service.  Receipts from a construction project are taxable, even when the customer is a government or is financed with industrial revenue bonds.  The existing language of Sections 7-9-57 and 7-9-52 cover the project promoted here.  
2.	Suit could be brought on equal protection grounds and on the prohibition expressed in Article IV, Section 24 of the New Mexico Constitution, “the legislature shall not pass local or special laws … [relating to] the assessment or collection of taxes; … [or] exempting property from taxation. In every other case where a general law can be made applicable, no special law shall be enacted.” 

OTHER IMPACTS AND ISSUES:
1.	Data from the 1997 IMPLAN data set show the following (millions of dollars):
		Tangible Portion	State Gross Receipts Tax	Local Gross Receipts Tax	
State and Local Construction	 1,037	 415	18.9	8.4	
Federal Construction Demand	 364	 145	6.1	2.9	
IRB financed construction	 200	 80	3.4	1.6	
					
    Total construction	 1,600	 640	26.4	12.9	

2.	The following counties are class B counties with 1990 population of over 47,000 and less than 60,000, and with 1999 property tax valuation of over $550,000,000.

County	1990 Population	1999 Property Tax Valuation	
Chaves	57,849	555,000,000	
Eddy	48,605	1,088,000,000	
Lea	55,765	1,021,000,000	

3.	Ultimately, the question is one of risk and priorities. The state must determine if the risk to future revenues (on the order of $30 million a year) is sufficiently weak to allow betting $8 to $10 million one-time, and $2 to $3 million a year on an investment in a plant that might generate $250 to $300 million in revenue a year, with purchases of Eddy, Lea and Chavez natural gas on the order of $100+ million per year. The gas burned in the plant would be subject to the gross receipts tax. The plant would become property taxable after 20 or 30 years, when the industrial revenue bonds are retired. If the state does move forward with this proposal, the most likely effect will be that the state and all cities and counties will forego tax revenue, while the host county of the plant and the natural gas producing areas of the state – principally in the Permian basin – will reap the benefits.

4.	Obviously, extending “manufacturing” to cover this one specially-favored plant is but the first step to including all power plants within “manufacturing.”  If that is the decision the Legislature wants to make, direct approach is clearer and fairer than pretending to carve out special, one-time exceptions.