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tees of the NM Legislature. The LFC does not assume responsibility for the accuracy of these reports if they are used

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

SPONSOR Stewart

DATE TYPED 2/03/05

HB 568

SHORT TITLE Decouple Estate Tax from Federal Changes

SB

ANALYST Taylor

REVENUE

Estimated Revenue

FY05

FY06

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

$12,000

$24,000

$20,000.0 Recurring

General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

Response Received From

Taxation and Revenue Department (TRD)

SUMMARY

TRD reports that HB 568 would reinstate the New Mexico estate tax as it existed prior to 2001. A copy

of the TRD analysis is attached.

FISCAL IMPACT

TRD estimates that reinstating the tax as it was prior to 2001 will increase revenues by $12 million in

FY05 and $24 million in FY06, and $20 million in subsequent years. They note that estimate is based

on historical collections adjusted for large, one-time payments. They also report that historically this

revenue has not demonstrated an increasing trend.

BT/lg:yr

See Attachment 1

House Bill 568 -- Page 2 Attachment 1

2005 N.M. LEGISLATURE

N.M. Taxation and Revenue Department

Jan Goodwin, Cabinet Secretary

DATE: February 1, 2005

BILL NUMBER: House Bill 568

SPONSOR: Representative Stewart

SHORT TITLE OR DESCRIPTION: De-couple from estate tax repeal

REVIEWED BY: Tax Research Bureau (Contact: tclifford@state.nm.us)

RELATED BILLS:

DESCRIPTION:

House Bill 568 would reinstate the state’s estate tax as it existed prior to federal law changes

implemented in 2001

1

. New Mexico’s estate tax law is tied directly to provisions of the federal

Internal Revenue Code (“IRC”). Thus, when the federal estate tax provisions in the IRC were

modified, New Mexico’s estate tax was directly affected. Major federal changes affecting state

taxes are described in the section “OTHER ISSUES.”

House Bill 568 would reinstate the state’s estate tax by reference to the federal law provisions in effect

as of December 31, 2000. These provisions included a unified credit amount – essentially an exclusion

of a portion of the estate from taxation -- of $950,000 for 2005 and $1,000,000 for 2006 and thereafter;

and a state credit (therefore tax rate) calculated as a percent of the taxable estate. The tax rate increases

from 0.8% for taxable estates over $40 thousand to 16% for taxable estates over $10,040,000. In addi-

tion to reinstating the former tax, House Bill 568 would add an additional $250 thousand to the exclu-

sion from the taxable estate, resulting in a total exclusion of $1.2 million for 2005 and $1.25 million in

all years thereafter.

EFFECTIVE DATE: 90 days after adjournment. Applicable to tax years beginning on or after

January 1, 2005.

FISCAL IMPACT

(Thousands of dollars): Note: Parentheses ( ) indicate a revenue loss.

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-

Recurring

Fund

Affected

FY 2005

FY 2006

12,000

24,000

20,000

Recurring

State General Fund

Fiscal impacts are based on actual collections over the last several years adjusted for statutory changes and to

exclude large, one-time payments. Revenue from the estate tax historically tends to be quite volatile from year to

year, and does not demonstrate an upward trend over time.

1

The federal changes were incorporated in the “Economic Growth and Tax Relief Reconciliation Act of 2001,” or EGTRRA.

House Bill 568 -- Page 3 Attachment 1

APPROPRIATION IMPACT: None

ADMINISTRATIVE IMPACT: The Department would face significant expense—in forms de-

velopment and system re-programming and would require additional FTE for revenue process-

ing to implement the proposal. If the federal estate tax is in fact repealed, the administrative

tasks become much more complex and costly.

TECHNICAL ISSUES:

The January 1, 2005 effective date implies a retroactive application of the statute. Retroactive

effective dates have been challenged as a violation of the due process provisions of the U.S.

Constitution. To avoid such a challenge, the provisions could be made effective on a prospec-

tive basis, for example “The provisions of this act apply to deaths occurring on or after July 1,

2005.”

OTHER IMPACTS AND ISSUES:

2001 Federal Estate Tax changes affecting state collections:

1. The state death tax credit against federal tax owed was phased out over a four-year pe-

riod. No credit is available for deaths occurring after 2004. This provision has the effect

of eliminating New Mexico’s estate tax after 2004 because the state’s tax was defined to

be equal to the amount of the credit as specified in federal law.

2. The unified credit amount—which effectively defines a tax-free “floor” below which es-

tates are not taxable—was increased from $675 thousand to $3.5 million over a period

of several years.

3. A new deduction for state taxes paid was created. Instead of a credit, the amount of

any state taxes can now be deducted from the taxable value of the estate for federal tax

purposes.

4. The federal estate tax is repealed effective for deaths occurring in 2010. However, the

tax is reinstated for deaths occurring in 2011 and after.

According to an October 2002 survey by the Federation of Tax Administrators, 12 states had

taken some action to offset all or part of the impacts of the estate tax changes adopted in

EGTRRA. Under state laws in effect at that time, there would be 30 states that would have no

state death tax in 2005 when the federal credit for state taxes is repealed.