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

SPONSOR Marquardt

DATE TYPED 2-10-2005 HB 375

SHORT TITLE Federal Testing and Evaluation Gross Receipts Tax SB

ANALYST Taylor

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

(700.0)

(2,900.0)

Similar Recurring

General Fund

(480.0)

(1,900.0)

Similar Recurring Local Governments

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to: HB 423

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

SUMMARY

House Bill 375 provides a new gross receipts tax deduction for certain services performed pursu-

ant to U.S. Department of Defense contracts brought into New Mexico. Specifically, gross re-

ceipts from testing and evaluation services on defense systems would be deducted from gross

receipts.

The bill carries an emergency clause, making its provisions applicable upon signing by the Gov-

ernor.

FISCAL IMPLICATIONS

The Taxation and Revenue Department estimates that this bill would reduce state general fund

revenues by $2.9 million and local government revenues by $1.9 million in FY06. The FY05

impact is about one-fourth the full-year impact, and reflects the effects of the emergency clause,

which would make the bill applicable to about 3 months in FY05.

House Bill 375 -- Page 2

The Taxation and Revenue Department’s estimate is based on the following information:

1.

Total annual Department of Defense revenue for research, development and evaluation in

New Mexico is estimated to be $257 million.

2.

60 percent of this, or $154 million, is for testing and evaluation services.

3.

Two-thirds of the $154 million, or $103 million, is estimated to be attributable to services

on system brought into New Mexico.

4.

The $103 million attributable to testing and evaluation services is reduced by 30 percent

to account for contracts going to out-of-state firms and subcontractors who are assumed

not to be eligible for the deduction. This leaves a tax base eligible for the deduction of

approximately $74 million.

5.

The estimated fiscal impact to the state of $2.9 million implies an effective state gross re-

ceipts tax rate of 3.9 percent; the $1.9 million impact to local governments implies an ef-

fective local gross receipts tax rate of 2.6 percent; and a combined effective rate of 6.5

percent.

ADMINISTRATIVE IMPLICATIONS

TRD reports that the administrative implications of the bill would be minor.

BT/yr