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

SPONSOR Balderas

DATE TYPED 3-3-2005 HB 995

SHORT TITLE Biomass-Related Equipment Tax Deduction

SB

ANALYST Taylor

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

($9.0)

Increasing Recurring State General Fund

($1.0)

Increasing Recurring Local Governments

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Energy Minerals and Natural Resources Department (EMNRD)

New Mexico Environment Department (NMED)

SUMMARY

House Bill 995 provides a compensating tax deduction for certain biomass-related materials and

equipment. The deduction is equal to the value of: a) a biomass boiler, gasifier, furnace, turbine-

generator, storage facility, feedstock processing or drying equipment, feedstock trailer or inter-

connection transformer; and b) biomass materials used for processing into biopower, biofuels or

biobased products.

PERFORMANCE IMPLICATIONS

The environment department reported that this deduction to could impact their performance

measure related to improving visibility. Their comment is replicated here:

Burning biomass in a controlled incinerator will result in fewer air emissions than if the

biomass was burned through wildfire, prescribed fire or crop management. Reducing

smoke emissions from burning could help the department make progress on its perform-

ance measure to improve visibility throughout the state.

The environment department submitted a State Implementation Plan to EPA in December

House Bill 995 -- Page 2

2003 pursuant to Section 309 of the federal Regional Haze Rule (40 CFR 51.309). Ac-

cording to this portion of the federal rule, the state is obligated to report every five years

its progress in achieving the renewable energy goal of 10 percent of the regional power

needs by 2005 and 20 percent by 2020. Implementation of HB 995 will help the state

achieve these renewable energy goals and better address regional haze in New Mexico's

national parks and wilderness areas.

The Energy, Minerals and Natural Resources Department’s report indicated these performance

impacts:

HB 995 will support further development of biomass energy resources in New Mexico.

Promotion, development, and implementation of renewable energy programs, including

biomass programs, are key parts of the strategic plan of EMNRD’s Energy Conservation

and Management Division. This bill will enhance EMNRD’s performance in this area. It

will also indirectly benefit EMNRD’s efforts to restore forest health, reduce wildfires and

diversify the state’s energy portfolio.

FISCAL IMPLICATIONS

The Taxation and Revenue Department is still investigating possible fiscal implications for the

bill. Their preliminary analysis indicates that the bill would have no fiscal impact in FY05, and a

small negative impact in FY06. The FY06 estimate indicates a $10 thousand dollar revenue loss.

Note, based on a 5 percent compensating tax rate, this implies that the value of equipment and

materials eligible for the deduction would be approximately $200 thousand.

There is a small local government impact because part of the compensating tax is shared.

ADMINISTRATIVE IMPLICATIONS

TRD analysis included this administrative impact statement: Compensating tax changes are

much easier to implement if they take effect on July 1 or January 1 because that is when new fil-

ers’ packet is sent out informing taxpayers of statutory changes.

TECHNICAL ISSUES

TRD’ analysis included this explanation of compensating taxes: Compensating tax applies to the

value of tangible personal property that is (1) manufactured by the person using the property in

the state; (2) acquired outside the state in a transaction that would have been subject to gross re-

ceipts tax had it occurred within the state, or (3) acquired in a transaction that was not originally

subject to tax but, because of subsequent use of the property should have been subject to tax.

Thus the proposal would exclude from tax all transactions that meet these criteria. It would not

exclude transactions that are currently subject to the gross receipts tax.

The environment department suggested the following amendment: Page 1, line 21, after the

word “trailer” add “, composting equipment, mulching equipment”

House Bill 995 -- Page 3

OTHER SUBSTANTIVE ISSUES

The New Mexico Environment Department’s analysis reported the following issues:

A tax deduction will encourage the use of biomass for the creation of power, fuels or prod-

ucts.

Biomass burning to generate power has been proposed in numerous locations throughout the

state. Agricultural and forest-related materials can be burned to generate power. These ma-

terials might otherwise be burned as part of field clearing, range management or as part of a

prescribed or wild fire. Air pollution emissions from biomass burning processes are less than

emissions from open burning of forest or agricultural materials. Additionally, the generation

of power from biomass burning means that less power is necessary from other conventional

sources of power that may have adverse effects to air quality.

The collection of landfill gas for production of energy is similarly beneficial. HB995 may

encourage the collection of landfill gas that otherwise would not be collected.

The bill may prioritize biomass burning over other environmentally beneficial practices such

as composting and mulch generation. This may send the wrong signal to communities as to

how best to handle vegetative materials. To clarify that biomass is not being promoted as the

preferred solid waste management practice, the bill should be amended to allow tax deduc-

tions for composting and mulch generation.

The Energy, Minerals and Natural Resources Department submitted these issues:

Significant biomass resources exist in the state, including forest-related, agricultural,

animal waste, solid woody waste materials, energy crops and trees, landfill gas, wastewa-

ter treatment gas, and segregated municipal solid waste. The vast majority of these re-

sources is not being utilized, but could generate useful energy, jobs and revenues—

especially in depressed rural areas. This bill encourages major investments in the equip-

ment required to process the available biomass into energy and value added products.

Benefits from development of biomass resources include reducing or eliminating envi-

ronmental impacts of current waste disposal practices; transforming waste and problem-

atic materials into revenue sources; improvement of air and water quality; diversification

of the state’s energy portfolio; and creation and retention of local jobs in New Mexico’s

rural economy.

Most energy dollars spent on fossil fuels leave the community, whereas dollars spent on

biomass energy stays in the community. Increased jobs and economic activity generate

important local, state and federal tax revenues.

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