NOTE:  As provided in LFC policy, this report is intended only for use by the standing finance committees of the legislature.  The Legislative Finance Committee does not assume responsibility for the accuracy of the information in this report when used for other purposes.

 

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F I S C A L   I M P A C T   R E P O R T

 

 

 

SPONSOR:

Heaton

 

DATE TYPED:

2/17/03

 

HB

193a/HBIC

 

SHORT TITLE:

Technology Startup Tax Credit Act

 

SB

 

 

 

ANALYST:

Neel

 

REVENUE

 

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY03

FY04

 

 

 

 

 

($920.0)

($1,000.0)

Recurring

General Fund

 

 

 

 

 

(Parenthesis ( ) Indicate Revenue Decreases)

 

Duplicates:

HB 14 Technology Startup Tax Credit Act

 

Relates to:

HB 21 Amend Lab Partnership/Small Business Act

SB 12  Amend Lab Partnership/Small Business Act

 

SOURCES OF INFORMATION

 

LFC files

 

Responses Received From

 

Taxation and Revenue Department (TRD)

Department of Economic Development

 

SUMMARY

 

Synopsis of HBIC Amendment

 

The House Business and Industry Committee Amendment defines the time where the tax credit can be taken to the preceding 12 month period prior to when the tax credit is sought.  Additionally, the amendment excludes for the purposes of the credits expenditures by other entities than those claiming the credit.

 

Last, the HBIC amendment eliminates the “double dip” provision whereby the credits included in HB 193a could overlap those taken pursuant to the current Technology Jobs Tax Credit Act (Section 7-9F NMSA 1978).  This “double dip” provision produces claims averaging about $1.2 million per year.  

 

     Synopsis of Original Bill

 

House Bill 193 enacts a new section of statute titled the Technology Startup Tax Credit Act (TSTCA) to allow a business to claim tax credits equal to the gross receipts, compensating or withholding taxes due to the state for engaging in “qualified research”.  Qualified research is

defined as research for the (1) purpose of discovering information that is technological in nature and where (2) substantially all activities contribute to improved performance and (3) are not cosmetic in nature. In order to qualify for the tax credits the entity’s:

 

·        Revenues cannot exceed $10.0 million;

·        Qualified expenditures must equal 20 percent of its revenues for the qualifying period;

  • Total employees cannot exceed 50; and
  • Another company cannot have more than 50 percent interest in the entity. 

 

Expenditures on property owned by a municipality or county in connection with an industrial revenue bond project or property for which the entity has received tax credits pursuant to the Capital Equipment Tax Credit Act, the Investment Credit Act or the Technology Jobs Tax Credit Act are expressly excluded. 

 

The tax credit is available for 59 consecutive months and the provisions of HB 193 will be administered by TRD. 

 

Provisions in HB 193 are effective July 1, 2003. 

 

     Significant Issues

 

The expressed goal for TSTCA is to provide a favorable tax climate for startup technology businesses in New Mexico, thereby promoting increased employment and higher wages in New Mexico.  The Legislature has consistently emphasized high technology job creation.  During the 2002 session, it passed HB 40 Software Development GRT Credit (Laws 2002, Chapter 10) to provide a gross receipts tax deduction for receipts for software design and development and web-site design and development.  The 2000 Legislature passed HB 19 Technology Jobs Tax Credits (Laws 2000, Chapter 22, 2nd SS) that provides a basic tax credit and an additional tax credit, both in the amount of 4 percent of the qualified expenditure made by a taxpayer conducting “qualified” research at a “qualified facility”.  To be eligible for the additional credit, the taxpayer must increase its payroll by $75.0 over the base payroll of the taxpayer for each $1.0 million of qualified expenditures.   

 

Attachments 1 and 2 graphically depict New Mexico’s need to “promote increased employment and higher wages”.  Attachment 1 shows New Mexico lagging the nation in nonagricultural employment growth. This under performance is projected to continue for the next few years.  Similar to employment growth, attachment 2 shows New Mexico maintaining higher personal income growth from 1991 to 1996 than the nation.  However, this growth declined in 1996-1997 and fell behind the rest of the nation.  The next four years saw lower personal income growth than the national average.  In 2001, New Mexico’s growth exceeded the national average due, in part, to the recession.

 

FISCAL IMPLICATIONS

 

TRD notes the following assumptions in regard to HB193, the 1997 Economic Census of Professional and Technical Services, New Mexico has over 110 research and development companies that employ fewer than 50 employees. Few of these firms have revenue in excess of $10 million.  Census data also indicates that payroll expenditures for research and development firms average 36% of total receipts.  This is almost twice the 20% criterion for expenditures spent “in connection with” qualified research, thus the 20% threshold does little to limit credit eligibility.  

 

The provisions of this bill, even with amendment, are not limited to actual “start-up” companies. The amendment by inserting the word “new” in the definitions of “business” and “qualified business” provides partial clarification. If the intent is to limit the credit to bona fide new businesses in the state and not extend it to “re-formed” businesses, the credit could be restricted to businesses established after some specific date.  For example, a qualified business could be defined as a “taxpayer who is not a successor in business of another taxpayer and whose primary business in New Mexico is established after July 1, 2003.”   

 

According to TRD, in fiscal year 2002, small research and development firms generated $161 million in total gross receipts and deducted $88 million (55%), leaving $73 million in taxable gross receipts.    Payroll expenditures subject to state withholding are estimated to have been $58 million.    A growth rate of 3% per year yields estimated fiscal year 2004 taxable gross receipts of $77.4 million and payroll of $61 million.

 

TECHNICAL ISSUES

 

It should be noted that HB 14a does not require that a qualified business be newly formed or new to New Mexico.  Therefore, existing technology firms would qualify for the technology startup credit. Thus, some of the tax expenditure will benefit existing businesses that may require no additional incentive to operate and expand in New Mexico.

 

Additionally, this proposal appears to create a “double dip” with credits taken pursuant to the current Technology Jobs Tax Credit Act (Section 7-9F NMSA 1978), with which this proposal has many overlapping provisions, and produces credit claims averaging about $1.2 million per year.  There is no provision contained in this proposal that would exclude a taxpayer from qualifying for credit under both programs.  This bill does define “qualified expenditure” to exclude “…property for which the taxpayer has received any credit pursuant to the Capital Equipment Tax Credit Act, the Investment Credit Act or the Technology Jobs Tax Credit Act.”  But this provision simply excludes the above expenditures from being counted towards the 20% of expenditures spent in connection with qualified research for the purposes determining credit eligibility.  It does not preclude a taxpayer from qualifying for credit under both programs.  Further, as stated above, payroll expenditures alone are likely to be sufficient to qualify a business for credit eligibility.   Nothing in the bill states that if a taxpayer claims credit pursuant to existing credit programs, the taxpayer is no longer eligible for the  “Technology Startup” credit. 

Pursuant to this proposal, once a business is qualified to claim credit, there is no cap on the amount of credit a business may claim. The credit amount is limited only by the combined gross receipts, compensating, and withholding taxes due. 

 

OTHER SUBSTANTIVE ISSUES

 

New Mexico compares favorably nationally regarding R&D tax incentives for industry.  The following shows tax incentive provisions:

 

  • R& D Tax Credit: 36 other states;
  • Investment Credits: 50 other states;
  • Specific Industry Credits: 16 state incentives;
  • Sales tax exemption for R&D: 15 other states;
  • Tax abatement for specific locations: 18 states; and
  • Internet infrastructure tax incentives: 4 states.  

 

SN/prr/njw