BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  3

DATE:  February 20, 2001	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SB - 779

SPONSOR: Senator Jennings

BILL SHORT TITLE: Imposing Gross Receipts Tax on 501(c)(3) Organizations; Using New Revenue to Provide a Recurring Personal Income Tax Reduction; Allowing a Personal Income Tax Deduction for Charitable Contributions; Adjusting Municipal Distributions.

CONFLICTS, DUPLICATES, COMPANIONS: This can be considered an alternative to the numerous bills introduced seeking a personal income tax reduction (see OTHER ISSUES AND IMPACTS). 

DESCRIPTION: This bill imposes the gross receipts tax on 501(c)(3) (non-profit educational, religious, cultural) organizations by restricting the existing deduction to non-profit organizations that provide services only to young people under the age of 18. The bill allows a personal income tax deduction equal to the amount of charitable contributions made by the taxpayer. The bill adjusts the distribution to municipalities by roughly the amount of windfall from imposing tax on non-profits (1.225% becomes .835%), although this provision seems to take more back from municipalities than they would gain. No adjustment is made for county revenues, however. The bill then spends the net increase in revenue from the first three provisions as a recurring personal income tax reduction of approximately $240M.

EFFECTIVE DATE: The gross receipts tax portions of this bill are effective July 1, 2001. The adjustment of municipal distributions will occur with August collections. The PIT rate reduction and charitable contribution provisions are 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 	FY 2003	FY 2004   	     Impact     t     	             Affected          .             	
136,000	156,000	164,000	Recurring	General Fund GRT	
91,000	104,000	110,000	Recurring	Municipalities GRT	
15,800	18,000	19,000	Recurring	Counties GRT	
(104,000)	(119,000)	(125,000)	Recurring	Muni Distribution	
104,000	119,000	125,000	Recurring	General Fund/ Muni Distrib.	
(4,800)	(5,300)	(5,500)	Recurring	Charitable Contributions	
(239,900)	(262,200)	(277,000)	Recurring	PIT Reduction – Gen Fund	
	21,000	21,000	Recurring	State Deduction Recovery	
(4,700)	28,500	27,500	Recurring	Gen Fund Net	
(13,000)	(15,000)	(15,000)	Recurring	Munis Net	
15,800	18,000	19,000	Recurring	Counties Net	
(1,900)	31,500	31,500	Recurring	All Funds Net	

ADMINISTRATIVE IMPACT: moderate because of complexity. PIT forms and instructions will have to conform to the rate reduction and charitable contribution portions. CRS will have to be reprogrammed for the change in state shared distribution to municipalities. Regulations and taxpayer workshop materials will have to be created to deal with taxability of  the non-profit sector which has enjoyed favored tax status since before statehood.  The Department will have to implement a program to verify charitable contributions deducted but not itemized on the federal return.  

TECHNICAL ISSUES:
1.	Section 5 provides a blanket deduction for charitable contributions.  Since the charitable contributions of itemizers are already deducted from AGI, the sponsor could not possibly have intended a double-dip.  The Department by instruction, will exclude charitable contributions itemized.  
2.	LANL’s receipts are currently exempt as receipts of a 501(c)(3). For business and liability reasons, the University of California long ago incorporated their management efforts at LANL as a 501(c)(3). 7-9-13 NMSA 1978 provides an exemption from gross receipts tax for the federal government and any instrumentality of the federal government and the state of New Mexico and any political subdivision thereof. Receipts of a political subdivision of another state (California) are not explicitly exempt under 7-9-13 NMSA.
3.	Article VIII, Section 3 of the New Mexico Constitution provides, “… all property used for educational or charitable purposes, … shall be exempt from taxation.” Generally, this section has been held to pertain only to property tax, but the state’s non-profit organizations would undoubtedly fasten on this constitutional guarantee as the organizing cry for a lawsuit aimed at overthrowing this proposed statute. It is by no means preordained that the NM Supreme Court would not interpret this section in favor of continued tax exemptions for most of the state’s non-profit sector, particularly hospitals that have enjoyed the longest run of tax exemption and were specifically exempt from Gross Receipts tax beginning in 1935 along with sales of nonprofit organizations.

OTHER IMPACTS AND ISSUES:
1.	Total 1998 personal income tax itemized deductions for charitable contributions were $412.1M on 152,092 returns. Assuming that this represents 80% of the total contributions statewide, section 5 of the bill will create about $100 million in new deductions (see TECHNICAL ISSUES #1). Under the new rates, the average marginal rate for non-itemizers is little less than 5%. Thus, the revenue loss from the charitable contributions will be (5,000). There will be no additional contributions to charities due to the slight reduction in after tax price of contributing.

2.	Total receipts of non-profits entities are approximately $3.66B as reported in the 1997 Economic Census. About $103M are likely to be excluded from taxability as delivering services exclusively to youth. The average gross receipts tax rate in municipal areas of the state is 6.13%, and in non-municipal areas 5.62%. It is assumed that 92% of these receipts are municipal. To the extent that sales of tangible personal property to 501(c)(3)s have been made taxable (possibly in the range of $500M in base) the fiscal impact is underestimated. To the extent that a large portion of tangibles and services sold to non-profits are for resale, and thus eligible for deduction under other portions of the gross receipts and compensating tax act, the fiscal impact is overstated. Conceptually (but probably not fiscally), these additions and subtractions cancel.

3.	It would take years for new economic patterns to be established following a change of this magnitude. There will be business closures in the non-profit sector, and possibly in the goods and services sector that sell  disproportionately to the state’s medical or non-profit sector. The biggest impact, undoubtedly would be in the health care area.

4.	
Estimates in $1,000s		
Estimated Newly Taxable base 1997	 3,554,837	
Growth from 1997 to FY 2002 @5%	 22.5%	
Muni Portion	92%	
Avg. Rate in Munis	6.13%	
Avg. Rate in non-muni areas	5.62%	
Avg. County rate in muni areas	0.375%	
		
State Portion	 148,625	
County Portion	 17,184	
Muni Portion	 99,356	
    Total	 265,165	

5.	The municipal distribution change from 1.225% to .835% is based on $25.7 plus $3.27B from this new tax base. This revenue loss is $113M, or somewhat greater than the revenue gain.

6.	The five-year impact of the PIT reduction is as follows:
	FY 2001	FY 2002	FY 2003	FY 2004	FY 2005	
Gross General Fund	(239,900)	(262,200)	(277,000)	(291,500)	(307,300)	
State Deduction Recovery		21,000	21,000	21,000	21,000	
Net General Fund	(239,900)	(241,200)	(256,000)	(270,500)	(286,300)	
Federal Deduction Recovery		48,200	48,200	48,200	48,200	
Net Taxpayer Benefit	239,900	193,000	207,800	222,300	238,100