BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE:  February 23, 2001 	Submitted by: TAXATION AND REVENUE DEPT.
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER: SB - 809

SPONSOR: Senator Tsosie

BILL SHORT TITLE: Exemption Power Projects on Navajo Nation Land from Payment of CIT, Gross Receipts and Compensating Taxes

CONFLICTS, DUPLICATES, COMPANIONS: This bill can be viewed as indirectly related to HB-293 Navajo Coal Tax Credit, but is totally unrelated to SB-739, which provides some of the same and additional tax incentives for electric generating facility in Lea, Eddy or Chaves counties.

DESCRIPTION: This bill intends to “sweeten the pot” for “power projects” located on the Navajo Nation. An eligible power project is defined as a generation, transmission or distribution power project. The corporate entity building a power project on Navajo trust or reservation land is eligible for a complete exemption from corporate income tax. Similarly, all receipts of an entity that constructs or operates a generation, transmission or distribution power project are exempt from gross receipts and compensating tax. The final provision of the bill is that the New Mexico Finance Authority is requested (required?) to work with the Navajo Nation in developing a financing package for the construction and operation of a power plant owned by the Navajo Nation.

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          .             	
	0 to millions	0 to millions	Recurring	General Fund	
	0 to millions	0 to millions	Recurring	Local Governments	

See “TECHNICAL ISSUES” # 1 and #2 below for an explanation of the contingency. If the Navajo Nation owns the proposed power project, then there is no general fund or local government impact. If even a trivial project is built on Navajo reservation or trust land, then that can create an unknown (but possibly large) impact on the state general fund and all local governments in the state, not just those located near the proposed power plant.

ADMINISTRATIVE IMPACT: minimal with regard to systems or processing, but a major impact on legal staff trying to defend the state general fund and local governments against a largely unintended, but potentially disastrous revenue loss.

TECHNICAL ISSUES:
1.	The corporate income tax exclusion proposed in this bill is known as an “entity exemption”. If a major investor-owned utility with a major current corporate income tax liability, for example, were to build a trivial distribution network on Navajo lands, this proposed entity exemption would prohibit the state from taxing any of the profits of this entity, not just the profits from the power project.
2.	The gross receipts and compensating tax exemption proposed in this bill is also an “entity exemption”. If a major investor-owned utility with a major current gross receipts and compensating tax liability, for example, were to build a trivial distribution network on Navajo lands, the entity exemption would prohibit the state from taxing any of the receipts, from any activity, of this entity, not just the receipts from the power project.
3.	If the Navajo Nation is the owner of the power projects, as anticipated in Section 3 of the bill, then sections 1 and 2 do not create any additional tax expenditures or incentives. All Indian nations, tribes and pueblos are already exempt from the corporate income tax. The Navajo nation is exempt from gross receipts tax on its sales and from compensating tax on non-construction tangible personal property.
4.	Recent changes in case law, statute and interpretation mean that the construction of power projects on Navajo trust or reservation land would be deductible from gross receipts tax, provided the power projects were owned by the Navajo Nation. In addition, legislation enacted last year allows contractors building on Indian land to issue non-taxable transaction certificates for materials and sub-contracted services, even if the project is not taxable.

OTHER IMPACTS AND ISSUES:
1.	If the Navajo Nation could pull off the financing, permitting, construction and operation of a 1,000 to 1,500 megawatt, coal-fired, base-load power plant in the four-corners region (similar in size and operation to San Juan Generating Station and Four-Corners Power Plant), it would seem to be a good economic development project. It would have no construction- or operational-phase revenue downside to any government entity. It would generate gross receipts and severance tax revenue on additional coal production, even if HB-293 – Navajo Coal Tax Credit -- also passes. It would be additional economic base in an area of chronic unemployment. With the other two power plants in the area, the pool of technicians is probably good. The multiplier effects of wages and salaries would be boon to gross receipts tax revenues in the areas surrounding the new plant. 
2.	The possibility of a Navajo-owned power generating plant “ups the ante” considerably for HB-293. HB-293 provides that the state recedes 75% from its severance and gross receipts taxes on production of coal on Navajo land. This tax sharing provides a new source of funds that the Navajo Nation could use to sell revenue bonds. If both tax revenue created by HB-293 and operating revenue from the power plant from the wholesale sale of power into the Western grid, the Nation could feasibly generate in excess of $300 million to build a 1,000 Megawatt facility. 
3.	The “incentives” provided in this bill are either poorly drafted or reflect the promoters’ view that the risks attending major projects on the reservation are so high that the state must heavily subsidize any such project.  The latter, of course, would be a violation of the anti-donation clause (Article IX, Section 14) of the New Mexico Constitution.