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

SPONSOR Stapleton

DATE TYPED 3/2/05

HB HJR 13/aHVEC

SHORT TITLE Property Tax Exemption For Certain Groups

SB

ANALYST Hanika-Ortiz

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

($372.0)

Recurring County and Municipal Funds

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to: SB-175, HJR-12, SJR-9

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of HVEC Amendment

The House Voters and Elections Committee amendment deletes the exemption from state prop-

erty taxation for a Section 501(c)(3) or 501(c)(10) fraternal beneficiary society, order or associa-

tions. The amendment adds language to allow the property exemption for a fraternal beneficiary

society, order or association that has been granted exemption from the federal income tax as de-

scribed in Section 501(c)(8) of the Internal Revenue Code. Additional language is also added to

prohibit such a society, order or association exempt from taxation pursuant to this section from

conducting gaming activities in New Mexico.

Significant Issues

The exemptions in the amendment reduce but do not eliminate the negative impact on county

and municipal funds. The full impact will be based on the number of qualifying fraternal organi-

zations in New Mexico that do not conduct gaming activities.

House Joint Resolution 13/aHVEC -- Page 2

To be exempt under Internal Revenue Code section 501(c)(8), a fraternal beneficiary society,

order or association must have a common pursuit, operate under the lodge system and provide

for the payment of life, sick, accident or other benefits to society members. The exemption will

be applicable so long as the members are eligible for benefits and the reasons for excluding cer-

tain members are reasonable.

Synopsis of Original Bill

HJR-13 would submit a proposed constitutional amendment to New Mexico voters that would

exempt from property tax properties owned by certain types of institutions. Property that would

become exempt includes: "...property of a fraternal beneficiary society, order or association that

has been granted exemption from the federal income tax as an organization described in Section

501(c)(3) or 501(c)(10) of the Internal Revenue Code."

Significant Issues

Article VIII, Section 3 of the New Mexico Constitution currently provides that:

“The property of the United States, the state and all counties, towns, cities and school districts

and other municipal corporations, public libraries, community ditches and all laterals thereof,

church property not used for commercial purpose, all property used for educational or charitable

purposes, all cemeteries not used or held for private or corporate profit and all bonds of the state

of New Mexico, and of the counties, municipalities and districts thereof shall be exempt from

taxation.”

TRD reports the proposed amendment appears to be consistent with current provisions of the

constitution.

PERFORMANCE IMPLICATIONS

If voters approve proposed amendment in the 2006 general election, enabling legislation would

most likely be approved by the legislature in 2007, and the exemptions would be available in the

2008 property tax year.

FISCAL IMPLICATIONS

TRD reports if proposed amendment is passed by the legislature and approved by voters, a por-

tion of the property tax burden from entities benefiting from the exemption will shift to entities

that do not, via property tax rate increases. Detailed statistics are not available regarding effects

of the proposed measure on taxable value by county. However, representatives of Bernalillo

County, which contains approximately 26 percent of the statewide non-residential net taxable

value, say the proposed measure would decrease their net taxable value by approximately $3.2

million. Assuming the statewide net taxable value of property subject to the new exemption is

3.85 times the Bernalillo total, or roughly $12.4 million, and multiplying by the 30-mill state-

wide average nonresidential property tax rate, suggests roughly $372,000 in property taxes are

currently paid by nonprofit entities that would benefit from the exemption. Hence, if voters ap-

prove the proposed amendment, enabling legislation would likely shift the burden of paying ap-

proximately $372,000 in property taxes – roughly .04 percent of the current $940 million total –

to entities not subject to the exemption.

House Joint Resolution 13/aHVEC -- Page 3

ADMINISTRATIVE IMPLICATIONS

TRD reports if voters approve proposed constitutional amendment, the administrative impact to

TRD would remain relatively minor because the property tax system is administered primarily

by counties.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Relates to SB 175, County Clerk Recording of Property Transfers

Relates to HJR-12, Statewide Millage Rate for Schools

Relates to SJR-9, Poverty Level Property Tax Exemption

TECHNICAL ISSUES

None indicated by TRD

OTHER SUBSTANTIVE ISSUES

According to the IRS web site:

501(C)(3) Organizations:

The exempt purposes set forth in IRC Section 501(c)(3) are charitable, religious, educational,

scientific, literary, testing for public safety, fostering national or international amateur sports

competition, and the prevention of cruelty to children or animals. The term charitable is used in

its generally accepted legal sense and includes relief of the poor, the distressed, or the under-

privileged; advancement of religion; advancement of education or science; erection or mainte-

nance of public buildings, monuments, or works; lessening the burdens of government; lessening

of neighborhood tensions; elimination of prejudice and discrimination; defense of human and

civil rights secured by law; and combating community deterioration and juvenile delinquency.

501(C)(10) organizations:

To be exempt under IRC 501(c)(10), a domestic fraternal society, order, or association must

meet the following requirements:

1.

It must have a fraternal purpose. An organization has a fraternal purpose if membership is

based on a common tie or the pursuit of a common object. The organization must also

have a substantial program of fraternal activities.

2.

It must operate under the lodge system. Operating under the lodge system requires, at a

minimum, two active entities: (i) a parent organization; and (ii) a subordinate organiza-

tion (called a lodge, branch, or the like) chartered by the parent and largely self-

governing.

3.

It must not provide for the payment of life, sick, accident or other benefits to its mem-

bers. The organization may arrange with insurance companies to provide optional insur-

ance to its members without jeopardizing its exempt status.

House Joint Resolution 13/aHVEC -- Page 4

4.

It must devote its net earnings exclusively to religious, charitable, scientific, literary, edu-

cational, and fraternal purposes.

5.

It must be a "domestic" organization, that is, it must be organized in the United States.

ALTERNATIVES

None indicated.

WHAT WILL BE THE CONSEQUENCES OF NOT ENACTING THIS BILL.

Proposed constitutional amendment under HJR 13 will not be submitted to voters for approval in

the 2006 general election.

AHO/njw:yr