Fiscal
impact reports (FIRs) are prepared by the Legislative Finance Committee (LFC)
for standing finance committees of the NM Legislature. The LFC does not
assume responsibility for the accuracy of these reports if they are used for
other purposes.
Current
FIRs (in HTML & Adobe PDF formats) are available on the NM Legislative
Website (legis.state.nm.us). Adobe PDF
versions include all attachments, whereas HTML versions may not. Previously issued FIRs and attachments may
also be obtained from the LFC in Suite 101
of the State Capitol Building
North.
F I S C A
L I M P A C T R E P O R T
|
SPONSOR
|
HBIC
|
DATE
TYPED
|
2/11/04
|
HB
|
16, 75, 331 /HBICS
|
|
SHORT
TITLE
|
Small Business
Research Gross Receipts
|
SB
|
|
|
|
ANALYST
|
Neel
|
|
|
|
|
|
|
|
|
REVENUE
|
Estimated
Revenue
|
Subsequent
Years
Impact
|
Recurring
or Non-Rec
|
Fund
Affected
|
|
FY05
|
FY06
|
|
High Wage Jobs Credit
|
|
(600.0)
|
(900.0)
|
(2,250.0)
|
Recurring
|
General Fund
|
|
(70.0)
|
($140.0)
|
(250.0)
|
Recurring
|
Local Governments
|
|
R& D Small Business Tax Credit
|
|
(4,200.0)
|
(4,400.0)
|
(4,400.0)
|
Recurring
|
General Fund
|
|
(730.0)
|
(760.0)
|
(760.0)
|
Recurring
|
Local Governments
|
|
(20.0)
|
(20.0)
|
(20.0)
|
Recurring
|
Small
Cities/
Small Counties Assistance
|
|
All Provisions:
|
|
(4,800.0)
|
(5,300.0)
|
(6,650.0)
|
Recurring
|
General Fund
|
|
(820.0)
|
(920.0)
|
(1,030.0)
|
Recurring
|
Local Gov.
|
(Parenthesis ( )
Indicate Revenue Decreases)
Relates: SB 31,
Research and Development Gross Receipts
HB 75, Research and Development
Gross Receipts
SOURCES OF INFORMATION
LFC Files
Response Received From
Taxation and Revenue Department (TRD)
Economic Development Department (EDD)
SUMMARY
Synopsis
of Bill
High Wage Jobs Tax
Credit
The
bill also amends statute to create a high wage tax credit equal to 10 percent
of wages and benefits of new employees in “high wage jobs”. The total credit is
limited to $12 thousand per eligible employee and credits must be claimed up to
four years. An eligible high-wage job must:
- be created after July 1, 2004
and before July
1, 2009;
- be occupied for
at least 48 weeks of the year prior to the claim for credit; and
- pay at least $40
thousand per year if located in a municipality of 40,000 or more residents,
or at least $28,000 per year else where in the state.
The tax credit can be
taken against the taxpayer’s modified combined tax liability (gross receipts
tax, compensating tax
and others, excluding local GRT).
The bill stipulates that
the enterprise qualifying for the tax credit must be a growing business
with employment greater
on the last qualifying day of the credit than the day when the new positions
was created. In addition, the job must be occupied for at least 48 weeks before
an employer is eligible for credits. An
eligible employer must make more than 50 percent of its sales outside of New
Mexico and be eligible for development training fund assistance pursuant to
Section 21-19-7 NMSA 1978.
Research and
Development Small Business Tax Credit
The bill also enacts gross receipts, compensating tax
and withholding credit for receipts of qualified research and development small
businesses. The credits may only be
claimed for a total of 36 months.
Qualified research and
development small businesses are defined to include corporations, general partnerships,
limited partnerships, limited liability companies, sole proprietorships and
similar entities that: employed less than 25 persons in the prior month, had
revenues that did not exceed $10 million in any prior fiscal year, were not
owned by another business as of the prior month, made qualifying research and
development expenditures in the previous 12 month period that are equal to at
least 20 percent of total revenues.
Qualified research
expenditures are defined to mean expenditures connected with qualified research. The definition excludes research funded by
another person or governmental entity, and expenditures for property owned by a
municipality or county in connection with an industrial revenue bond or for
which the tax payer has received any credit from the capital equipment tax Credit
Act, the Investment Credit Act or the Technology Jobs Tax Credit Act.
Qualified research is
defined as research that is technological in nature and intended to be useful
in the development of a new or improved business component of the
taxpayer.
Qualified research
must be related to new or improved function, performance, reliability or
quality, but not style, taste, cosmetic or seasonal design factors.
FISCAL IMPLICATIONS
TRD notes the following assumptions in
determining the fiscal impact:
R&D small business tax
credit:
According to department records and
information provided by industry representatives, there are about 280 taxpayers
currently operating in New Mexico who could potentially
qualify for the R&D tax credit. In
fiscal year 2003, these businesses paid $1.8 million in GRT, $3 million in
withholding and $100 thousand in compensating tax.
High-wage jobs tax credit:
The fiscal impacts of the provision are limited in
the first year because of the requirement that an employee
hold a new job for 48 weeks before an employer is eligible for credits.
Analysis
of information from the in-plant training program suggests that, in a recent
year, approximately 30 employees in non-urban settings, and 90 employees in
urban settings would have qualified for this credit had it been in effect. The associated cost of the credit for these
employees would have been $400 thousand on an annual basis. The total population of eligible firms would
be larger than the number of firms currently participating in in-plant
training, so the impacts would be larger than $400 thousand per year. Although a precise estimate is not possible,
the annual impact was increased to $600-$700 thousand to reflect firms not
currently in the in-plant training program.
The annual cost of the proposal increases over time because the credits
can be claimed for up to 4 years for each eligible employee. The estimated “Subsequent Years Impact”
reflects the maximum annual cost of the provision once it has been in place for
three years. The proposal contains a
sunset date of July
1, 2009, so the fiscal impacts would diminish
gradually after that date.
Local government impacts are attributable to
two effects: (1) If credits are applied
against the state’s 5% gross receipts tax in a municipal area, 1.225% of the 5%
is reduced municipal revenue sharing (Section 7-1-6.4 NMSA 1978); (2) If the
credit is applied against compensating tax liability, 20% of the revenue effect
will be taken against the distributions to the small cities and small counties
assistance funds (Section 7-1-6.2 and 7-1-6.5).
The share of credits applied against these revenue sources was modeled
based on experience with the investment credit program.
ADMINISTRATIVE
IMPLICATIONS
The
TRD analysis reports the following administrative impact:
The provisions in this bill would have an
administrative impact on the department.
The department must revise forms and instructions for claiming the
deduction, and systems must be modified in order to accept and track the
deduction.
The definition of “qualified research” is the same
definition used in the current Technology Jobs Tax Credit Act. This definition is very broad and somewhat
vague. Particular problem areas
include the phrase “new or improved business
component”. It is not at all clear what
this means, and has caused difficulties when evaluating applications for the
technology jobs tax credit. The phrase
“process of experimentation” has been difficult to interpret as well. Some interpretational issues can be addressed
by regulation.
TECHNICAL ISSUES
TRD notes the
following technical issues:
R&D
small business tax credit:
The
proposed R&D credit is not limited to newly formed businesses or businesses
that are new to New Mexico. There are currently nearly 300 small R&D
businesses already located in New
Mexico. “Qualified expenditure” is defined as an expenditure
by a taxpayer “in connection with” qualified research.” It is not clear what is meant by “in
connection with.” With this definition,
payroll, equipment, software, supply, travel and administrative expenses
incurred by research and development firms would all qualify. According to the 1997 Economic Census,
payroll expenditures alone for R&D firms average 36% of total
receipts. This is almost twice the 20%
criterion for determining credit eligibility.
Thus the 20% criterion does little to limit eligibility.
The R&D credit proposal
appears to create a “double dip” with credits taken pursuant to the current
Technology Jobs Tax Credit and Investment Tax Credit. There is no provision contained in this proposal
that would exclude a taxpayer from qualifying for credit under multiple
programs.
·
Although this bill defines “qualified expenditure” to exclude “…expenditures
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,” this provision simply excludes the 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
under multiple programs. Further,
payroll expenditures alone are likely to be sufficient to qualify a business
for the R&D credit.
·
The R&D credit proposal does contain some limited anti
“double dip” language. If, in a particular
reporting period, a taxpayer claims a technology jobs, investment or capital
equipment credit against a tax liability, then the taxpayer may not claim the
R&D credit for that same reporting period (Section 4, paragraph B,
subparagraph 8, on page10). Similarly,
Section 6, on page 11 stipulates that claiming the R&D credit renders a
taxpayer ineligible to claim the credit pursuant to the aforementioned acts in
the same reporting period. These limitations do prevent a taxpayer from
actually applying credit amounts from multiple credit programs to a particular
month's tax liability.
- However, technology jobs credits,
investment credits and capital equipment credits can all be carried
forward. As a hypothetical example
of a potential “double dip” scenario, a taxpayer may apply and be approved
for both technology jobs and R&D credits, claim the R&D
credit for three
years while “banking” technology jobs
credits. When three years has expired on
the R& D credit, the taxpayer may begin to claim their banked technology
jobs credits.
·
Nothing in the bill states that if a taxpayer qualifies and claims
credit under the R&D credit, the taxpayer would no longer be eligible to
qualify for credit under existing credit programs.
High wage jobs credit:
Refundability
of credits: The provision allowing the excess of credits over liabilities to be
refunded to the taxpayer could be challenged under the anti-donation provisions
of the NM Constitution.
Applicability with other tax
incentives: Applicants for this credit would potentially be eligible for certain
other incentives including the investment credit, the rural job tax credit or
the technology jobs tax credit. The lack
of coordination between these statutes means that the extent of the subsidy
being provided to a particular enterprise is unknown. Excessive subsidies may be provided.
OTHER SUBSTANTIVE
ISSUES
The Legislature has
consistently emphasized economic development and job creation. The 2003
Legislature renewed the job mentorship tax credit that encourages businesses
to hire young people to participate in career preparation education programs by
providing tax credits of up to 30 percent of the gross wages paid for employing
young people; the credit is limited to 320 hours per student. The Investment
Tax Credit Act (Chapter 402) was amended to reduce the employment requirements to
qualify for the credit; it now allows tax credits equal to 5 percent of
the value of qualified equipment purchased and incorporated into
certain manufacturing operations in the state.
In 2002 the Legislature
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.
New Mexico Economic Performance. Two of the most vital indicators of a state’s economy
are its employment and income growth. Although these indicators
are often influenced by
external forces, the mission of the Economic Development
Department remains to provide
programs and policies that help lead the state in a direction
that produces an overall benefit for
the citizens of New Mexico.
Figures 1 and 2 graphically depict New Mexico’s need to “promote
increased employment and higher wages”. As illustrated in Figure 1, New Mexico lagged behind the United States in nonagricultural employment growth from 1996 to 2000. When
the United
States economy
slipped into a recession in 2001, 2002, and 2003, New Mexico sustained a modest rate of job growth and ranked among the
fastest growing states.
Similar to employment growth, New Mexico maintained a higher personal income growth from
1991 to 1996 than that of the nation. Growth, again, began to
decline in 1997 and fell behind the
United States. But in 2001 and 2002, New Mexico’s growth surpassed the nation’s, primarily
due to the
recession, as shown in the personal income growth graph.
SN:dm/njw