NOTE: As provided in LFC policy, this report is intended 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 in any other situation.

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(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates SB677

SOURCES OF INFORMATION

Taxation and Revenue Department

State Department of Education

Synopsis of the HEC Amendment

The HEC amendment clarifies that the definition of a qualifying school means a New Mexico public school. The amendment does not change the analysis.

SUMMARY

The stated purpose of the qualified schools bonds act is to implement a state program allowing eligible tax payers to take advantage of available tax credits by expanding the incentives to purchase and hold bonds and thereby increase financing alternatives for modernization and rehabilitation of public school facilities and enhancing teacher training.

The bill would allow eligible New Mexico corporate taxpayers (financial institutions engaged in the business of lending money) to take a tax credit against the state's corporate income tax if they are qualified to claim a federal tax credit for qualified zone activity bonds. The state credit would be equal to the federal tax credit. The credit could only be used against corporate income tax liability in the taxable year.

School districts would be allowed to designate and issue qualified school bonds (which are interest free) provided that:

• •at least 95 percent of bond proceeds go to qualified purposes (as determined by IRS regulations);
• •it has the approval of the school's governing body;
• •the qualifying school's governing body has approved the bond issue and received commitments from private entities for qualified contributions having a present value of at least 10 percent of the bond proceeds;
• •the Public School Capital Outlay Council has reserved an amount equal to bond proceeds for the project.

The Public School Capital Outlay Council would serve as the body empowered to allocate qualified zone academy bonds for qualifying projects. Qualifying schools would be those with at least 35 percent of the student body qualified to receive federally subsidized lunches or schools located in a federal empowerment zone or enterprise community.

FISCAL IMPLICATIONS

The State Department of Education reported that the federal government authorized $4.9 million in qualified zone academy bonds for New Mexico in 1998 and $4.0 million in FY 2000. Based on these numbers and an estimated "applicable federal rate" of 7 percent, the Taxation and Revenue Department estimated that the bonds would result in a $280 thousand federal credit. Since the state credit is equal to the federal credit, the cost to the state would also be $280 thousand if all the eligible credits are used. Given the capital needs of the state's schools, it seems likely that all credits would in fact be used. The fiscal impact does not show variations that may occur due to changes in the federal allocation made to the state as these are unknown.

ADMINISTRATIVE IMPLICATIONS

SDE reports a minimal administrative impact. TRD reports that the legislation would not impose a significant impact on that department.

OTHER SUBSTANTIVE ISSUES

TRD notes that there may be an anti donation problem associated with the legislation because the implied yield on the bonds is substantially higher than on instruments of comparable risk. The high yield is partially the result of a state credit equal to the federal credit even though the state corporate income tax rate is only 20 percent of the federal rate.

BT/njw