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

 

 

 

SPONSOR:

Nunez

 

DATE TYPED:

3/18/03

 

HB

252/aHTRC

 

SHORT TITLE:

Agricultural Water Tax Credits

 

SB

 

 

 

ANALYST:

Neel

 

 

REVENUE

 

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY03

FY04

 

 

 

 

($20.0)

($100.0)

Recurring

General Fund

 

 

 

 

 

(Parenthesis ( ) Indicate Revenue Decreases)

 

Relates to SB 128, Unused Water Forfeiture Exemption

 

SOURCES OF INFORMATION

 

LFC files

 

Responses Received From:

 

Department of Agriculture

Office of State Engineer

Taxation and Revenue Department (TRD)

 

SUMMARY

 

   Synopsis of HTRC Amendment

 

The House Taxation and Revenue Committee amended HB 252 to reduce the maximum allowable credit to $1.0 from $50.0 for eligible improvements an individual can claim against their income tax liability.  Additionally, in promulgating rules in determining whether improvements may qualify for the credit the Soil and Water Conservation Commission is to receive information from the State Engineer.  

 

     Synopsis of Original Bill

 

House Bill 252 provides a personal and corporate income tax credit for agricultural water       conservation expenses.  It provides for a credit against income tax liability equal to 75 percent of incurred expenses, not to exceed a maximum annual credit of $50,000, for eligible improvements in irrigation systems or water management methods.  A credit may be claimed for the taxable year in which expenses are incurred if the taxpayer in that year: owned or leased a water right appurtenant to the land on which an eligible improvement was made; complies with a water conservation plan approved by the local soil and water conservation district in which the improvement is located; and the improvement is primarily designed to conserve water on land in New Mexico that is owned or leased by the taxpayer and used by the taxpayer or the taxpayer’s lessee to produce agricultural products, harvest or grow trees, or sustain livestock. 

 

     Significant Issues

 

According to the State Engineer, there is little incentive at the present time for irrigators to make improvements to their irrigation systems to conserve water.  A tax credit will provide an incentive for making improvements in irrigation efficiency. 

 

As proposed in this bill, a preferable way to encourage water conservation is to provide tax incentives to those who invest in drip irrigation and other water conservation techniques. 

If irrigators attempt to increase the number of acres irrigated using conserved water, or attempt to lease this water to other farmers, this will increase the total consumptive use of water which could reduce return flows and surface water supplies that are available to downstream irrigators. 

 

The rules promulgated by the soil and water conservation commission which establish the guidelines for determining which improvements are eligible for tax credit (Section 1.F of the bill)  should be written in such a way as to place certification of eligibility (methods, standards) in the hands of either the soil and water conservation commission or the New Mexico Department of Agriculture.

 

There should be language in the bill assuring that persons or entities cannot claim a tax credit as a person and as corporation but only as one or the other.

 

FISCAL IMPLICATIONS

 

The fiscal impact has been revised down proportionally from the original tax credit.  The amended bill changes the maximum allowable credit from $50.0 to $1.0 or 98 percent. The associated fiscal impact has been amended accordingly to $20.0 in FY04 and $100.0 in subsequent years.

 

TRD notes the following assumptions in determining the fiscal impact:

 

According to the Water Use and Conservation Bureau of the Office of the State Engineer, there are over 1 million acres of irrigated cropland in New Mexico.  The USDA Economic Research Service reports that farms in New Mexico spend about $70 million per year on repair and maintenance of capital items.  The USDA reports that net farm income was approximately $500 million in 2000. 

 

These data suggest that irrigation expenditures are a major category of spending for farm operations in New Mexico.  The revenue estimate assumes these expenditures comprise roughly one-tenth of the total capital and maintenance budget, or about $7 million per year.  The annual value of the credit would then be 75% of this amount, or about $5 million per year.  This estimate is only an approximation of the potential impacts of the proposal because the Department does not have detailed information on irrigation expenses. 

 

The FY 2004 estimate reflects adjustments to tax payments for the first six months of tax year 2004

 

TECHNICAL ISSUES

 

TRD notes that HB 252 would require the development of mechanisms to verify that the tax basis of the equipment is decreased by the amount of the credit. The mechanisms would be manual by nature.  Modifications will be required in forms and instructions for both personal income tax and corporate income tax, systems and training for department personnel.  Therefore, the department would require an additional FTE to carry out the associated tasks.

 

The measure would probably not allow owners of S-corporations to share the credit.  Owners of S-corporations are co-owners of the corporation not co-owners of the land. If the intent is for owners of S-corporation to share the credit, the term “pass-through entity” should be employed in statute. An example of this type of language would be similar to: “If a pass-through entity (S-corporation partnership or limited liability company) owns the land on which an eligible improvement in irrigation systems or water management method is made, the owners of the entity may claim a pro rata share of the credit allowed….”.

 

If HB 252 and SB 128, Unused Water Forfeiture Exemption were enacted into law the potential sale of water rights under SB 128 may help mitigate the general fund revenue loss included in HB 252.

 

SN/njw:yr