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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 02/11/05 HB 844

SHORT TITLE Heads Of Household Income Tax Relief

SB

ANALYST Padilla-Jackson

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

($1,250.0)* ($2,240.0)

($1,840.0) Recurring

General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

* Due to the assumed effective date, FY05 would only accrue half of a full-year benefit.

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

House Bill 844 amends the Income Tax Act to provide tax relief to heads of households. The

bill would apply the same income tax rate structure currently applied to married individuals fil-

ing joint returns to heads of household. One major change is that the bill would allow a head of

household to qualify for the lower tax rate structure earning slightly higher income. The present

and newly proposed tax rate structures are summarized in the table below.

House Bill 844 -- Page 2

Proposed Income Tax Rates for Heads of Household

If Taxable Income Is:

The Tax Shall Be:

Taxable Year beginning in 2005 Taxable Year beginning in 2006 Taxable Year beginning on or after 2007

< $8,000 1.7% of Taxable Income

1.7% of Taxable Income

1.7% of Taxable Income

$8,000 > $16,000 $136 plus 3.2% of excess over $8,000 $136 plus 3.2% of excess over $8,000 $136 plus 3.2% of excess over $8,000

$16,000 > $24,000 $392 plus 4.7% of excess over $16,000 $392 plus 4.7% of excess over $16,000 $392 plus 4.7% of excess over $16,000

> $24,000 $768 plus 6% of excess over $24,000 $768 plus 5.3% of excess over $24,000 $768 plus 4.9% of excess over $24,000

Existing Tax Rates for Heads of Household

If Taxable Income Is:

The Tax Currently is:

Taxable Year beginning in 2005 Taxable Year beginning in 2006 Taxable Year beginning on or after 2007

< $7,000 1.7% of Taxable Income

1.7% of Taxable Income

1.7% of Taxable Income

$7,000 > $14,000 $119 plus 3.2% of excess over $7,000 $119 plus 3.2% of excess over $7,000 $119 plus 3.2% of excess over $7,000

$14,000 > $20,000 $343 plus 4.7% of excess over $14,000 $343 plus 4.7% of excess over $14,000 $343 plus 4.7% of excess over $14,000

> $20,000 $625 plus 5.3% of excess over $20,000 $625 plus 5.3% of excess over $20,000 $625 plus 4.9% of excess over $20,000

Example of Savings

Annua l Sala ry

$22,000

Taxable Year beginning in 2005 Taxable Year beginning in 2006 Taxable Year beginning on or after 2007

Existing Rates

$731

$731

$723

Proposed Rates

$674

$674

$674

Total Annual Savings

$57

$57

$49

$28,000

Taxable Year beginning in 2005 Taxable Year beginning in 2006 Taxable Year beginning on or after 2007

Existing Rates

$1,049

$1,049

$1,017

Proposed Rates

$1,008

$980

$964

Total Annual Savings

$41

$69

$53

No effective date was specified, however, the TRD fiscal impact assumes 90 days after adjourn-

ment, applicable for tax years beginning on or after January 1, 2005.

FISCAL IMPLICATIONS

The total fiscal impact, based on analysis provided by TRD, is -$2,240.0 to the general fund in

FY06. According to their analysis, annual New Mexico income tax obligations of head of

household filers totaled approximately $53 million in tax year 2003. Simulations based on the

2003 return data indicate that tax reductions associated with the proposed measure are likely to

total approximately $2.5 million in tax year 2005 (or approximately $2.2 million for FY05),

$1.98 million in tax year 2006 (or approximately , $2.2 million in FY06) and $1.7 million in tax

year 2007 (or approximately $1.8 million in FY07). Note FY06 is made up of proceeds from

one half of tax year 2005 and one half of tax year 2006. TRD notes that tax benefits of the pro-

posed measure would decrease as the maximum personal income tax rates were scheduled to fall

from 6.0 percent in tax year 2005 to 4.9 percent in tax year 2007.

ADMINISTRATIVE IMPLICATIONS

TRD believes that the provisions of the bill could be administered with resources currently avail-

able to the department.

OTHER SUBSTANTIVE ISSUES

According to TRD, the proposal would benefit approximately 121,500 individuals. The average

benefit per return would be approximately $38. Treating single heads of household in the same

way as married couples would address equity (fairness) concerns.

House Bill 844 -- Page 3

TRD notes that, on average, incomes of individuals filing head of household returns are substan-

tially below those who file married joint. In tax year 2003, approximately 143,000 taxpayers

filed head of household returns. 52,000 head-of-household filers (about one-third) reported tax-

able income in excess of $7,000. In contrast, of the approximately 320,000 joint returns filed for

2003, roughly 227,800, or 70 percent, reported taxable income in excess of $7,000.

OPJ/lg