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

SPONSOR HGUAC

DATE TYPED 3/12/2005 HB

581/HGUACS/aHTRC

/aSCORC

SHORT TITLE Local Option Compensating Taxes

SB

ANALYST Taylor

REVENUE

Estimated Revenue

FY06

FY07

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

$6,500.0

Similar

Recurring

Municipalities

$2,400.0

Similar

Recurring

Counties

$250.0

Similar

Recurring TRD Administration

$190.0

Similar

Recurring

General Fund

$40

Similar

Recurring Small Counties/Cities

Assistance

(Parenthesis ( ) Indicate Revenue Decreases)

Duplicates SB118

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of SCORC Amendments

The SCORC amendments make the following changes to the bill:

1.

Section 6, which would have allowed the Taxation and Revenue Department to take ac-

tion to enforce local option gross receipts tax obligation due on purchases from individu-

als for non-business transaction, is struck from the bill;

2.

The credit provided against the state compensating tax is deleted.

3.

An additional exemption to the local option compensating tax is provided for property

used by the railroad, airline and cable industries.

House Bill 581/HGUACS/aHTRC -- Page 2

Fiscal Impact of SCORC Amendments

The amendment regarding enforcement of individual purchases slightly increases revenues to the

state general fund and the small cities and small counties assistance fund. TRD estimates that

the General Fund impact from this provision is a positive $190 thousand; small cites and small

counties revenues increase by about $20 thousand each.

The additional exemptions provided to the railroad, airline and cable industries would reduce the

fiscal impacts of the bill by about 20 percent, according to TRD.

Eliminating the credit against the state compensating tax effectively eliminates the general fund

impact, other than the small gain that results from striking the section 6 amendment.

Synopsis of HTRC Amendments

1.

The HTRC amendment changes the effective date of the bill from July 1, 2005 to July 1,

2006.

Fiscal Impact of HTRC Amendments

The change in the effective date, delays the fiscal impact by one year, and provides TRD more

time to implement the administrative issues.

Synopsis of Substitute Bill

The House Government and Urban Affairs Committee (HGUAC) substitute for House Bill 581

allows county and municipal governments to impose a local option compensating tax. The local

option compensating tax is imposed pursuant to current local option gross receipts taxes. Local

option compensating tax rates mirror local option gross receipts tax rates. A 0.5 percent credit

against the state compensating tax is provided. The bill requires TRD to administer the tax and

transfer payments to local governments in the same way it does the state compensating tax.

The substitute bill also provides an exemption to the local option compensating tax for property

used by the mining, oil and natural gas, electric and gas utilities or telecommunications indus-

tries. (This exemption is how the substitute differs from the original bill).

The bill has an effective date of July 1, 2005.

FISCAL IMPLICATIONS

TRD estimates that the HGUAC substitute for HB 581 as amended by House Taxation and

Revenue Committee, which enacts a local government compensating tax in FY06 would increase

local government recurring revenues by a little less than $11 million ($7.9 million for munici-

palities; $2.90 million for counties).

TRD’s analysis reports that the FY06 compensating tax base is $925 million, and the statewide

weighted average local option tax rate is 1.4 percent. . However, the exemption provided to the

House Bill 581/HGUACS/aHTRC -- Page 3

mining and utility industries reduces the tax base. TRD reports that 29 percent of the compensat-

ing tax is paid by industries eligible for the exemption. They are uncertain as to how much of

this would ultimately be exempted because of not being available from New Mexico suppliers.

They assume that half of the 29 percent is exempted. This implies the compensating tax base

will be about $786 million (85 percent of $925 million). Multiplying the $786 million tax base

by the 1.4 percent average rate yields $11 million in additional local government revenues. The

$11 million is divided between municipalities and counties based on where taxpayers report.

The general fund and small counties/cities assistance fund revenue losses result from 0.5 percent

credit provided against the state compensating tax. This has the effect of reducing the state com-

pensating tax in municipal areas from 5.0 percent to 4.5 percent.

ADMINISTRATIVE IMPLICATIONS

TRD reports that this bill would have major administrative impacts. Their analysis is repeated

here:

The exemption for some equipment for purposes of the local option compensating tax

causes a significant increase in the complexity of administering the proposal. Providing

this exemption will require the Department to change the Combined Revenue System

(“CRS”) reporting forms significantly. Determining whether equipment was available

from local sources on audit will be extremely difficult.

The provisions in this bill would have a major administrative impact on the department.

In order to capture the data necessary to distribute revenue from the new local option

taxes, larger CRS reporting forms would be required. This, in turn would require at least

four full-page scanners at a cost of about $550 thousand apiece. Five additional FTE

would be required to enter the additional data and verify distribution amounts. Absent

full-page scanners and additional resources, there is a high likelihood of late revenue dis-

tributions to local governments resulting from increased time for processing tax returns.

Major computer systems changes would be necessary to make the appropriate local reve-

nue distributions. Reprogramming the system is possible. However, the effective date of

July 1, 2005, does not allow the department enough time to implement the changes by

the effective date. An effective date of January 1, 2006, would give the department

enough time to incorporate the changes.

TECHNICAL ISSUES

TRD’s analysis of technical issues is replicated here:

This substitute bill allows the mining, oil and natural gas, electric and gas utilities and

telecommunications industry to exempt tangible personal property from local option

compensating taxes if that property is not available from New Mexico sources. The term

“not available” is not defined, nor is it clear who will determine whether the property is

available from New Mexico sources. If the aforementioned industries are to determine

the availability of property, then it is possible that property that is not available within

budget limitations or within a certain time frame would be exempt. The term “not avail-

able” should be strictly defined. The bill should also explain how property will be

deemed “not available.”

House Bill 581/HGUACS/aHTRC -- Page 4

The industries eligible to exempt personal property from the local option compensating

taxes—mining, oil and natural gas, electric and gas utilities and telecommunications in-

dustry—also need to be defined.

Section 9, page 17, lines 7-19. The local option compensating tax is imposed on the use

of property, not the use of services. This makes the reference to “use or service” on lines

9-10 confusing. Suggested correction: Delete the term “or service” after the word “use”

on line 9.

Section 9, p. 17, lines 14-19; Section 15, p. 25, lines 7-15; Section 18, p. 28, lines 15-19;

Section 21, p. 31, lines 11-21; Section 24, p. 34, lines 11-23. These provisions, as

amended, provide that where a local gross receipts tax is in effect on the effective date of

the law enacted by the bill, the corresponding local compensating tax is automatically

imposed at the same rate. If the original local gross receipts tax was adopted by vote of

qualified electors, the subsequent automatic addition of the compensating tax may result

in arguments that the compensating tax is improper because it falls outside the scope of

the ballot questions submitted to the voters.

Section 8, beginning on page 16, refers to the “municipal compensating tax.” The bill,

however, provides for a “supplemental municipal compensating tax” and a “municipal

local option compensating tax” but not a “municipal compensating tax.” The term “mu-

nicipal compensating tax” is not mentioned nor defined in any other section of the bill.

Numerous tax laws may have to change to make sure that local option compensation

taxes are referred to and defined.

OTHER SUBSTANTIVE ISSUES

TRD notes a policy advantage to making the compensating tax equivalent to the gross receipts

tax rate is that it would eliminate a tax induced incentive for buyers to purchase from out of state

vendors.

BT/lg:yr