Fiscal impact reports (FIRs) are prepared by the Legislative Finance Committee (LFC) for standing finance

committees of the NM Legislature. The LFC does not assume responsibility for the accuracy of these reports

if they are used for other purposes.

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attachments may be obtained from the LFC in Suite 101 of the State Capitol Building North.

FISCAL IMPACT REPORT

SPONSOR SFC

DATE TYPED 03/18/05 HB

SHORT TITLE Aviation Fund Distributions To Airports

SB CS/75/a SCORC

ANALYST Padilla-Jackson

APPROPRIATION

Appropriation Contained

Estimated Impact

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

FY09

$391.4

$985.4

$3,145.4

$3,145.4 Recurring State Aviation

Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

$391.4

$985.4

$3,145.4 Recurring State Aviation Fund

$147.0

$147.0

$147.0 Recurring Local Government

(GRT on Jet Fuel)

$41.0

$41.0

$41.0 Recurring

General Fund

(SB478)

($246.0)

($840.0)

($3,000.0) Recurring

General Fund

(SB75)

($205.0)*

($799.0)*

($2,959.0) Recurring Combined General

Fund (SB75 CS)

(Parenthesis ( ) Indicate Revenue Decreases)

*See Fiscal Implications Section for discussion on potential indirect fiscal impacts.

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Transportation (DOT)

Senate Bill CS/75/aSCORC -- Page 2

SUMMARY

The Senate Finance Committee substitute for Senate Bill 75 as amended by Senate Corporations

and Transportation Committee would amend the current distributions to the State Aviation Fund

and eliminate time limits on tax deductions for gross receipts and compensating tax.

Eligibility and Distributions

The bill limits eligibility for the gross receipts and compensating tax deductions, requiring that

the taxable gross receipts attributable to the sale of fuel specially prepared and sold for use in

turboprop or jet-type engines be sold to “commercial aviation operators”. Accordingly, the bill

amends the current statutes so that the existing distribution to the State Aviation Fund of 4.79

percent apply to gross receipts attributable to the sale of fuel specially prepared and sold to

commercial aviation operators. Additionally, the bill adds a new section that would distribute

3.375 percent to the State Aviation Fund for receipts attributable to the sale of fuel specially pre-

pared and sold to persons or entities that are not commercial aviation operators.

The bill would create a new distribution to the State Aviation Fund from gross receipts tax reve-

nue in amount equal to:

(1)

twenty thousand five hundred dollars ($20,500) monthly from July 1, 2005 through June

30, 2006;

(2)

seventy thousand dollars ($70,000) monthly from July 1, 2006 through June 30, 2007;

and

(3)

two hundred fifty thousand dollars ($250,000) monthly after July 1, 2007.

The bill defines "commercial aviation operator" to mean a person or entity that, for compensation

or hire, engages in the carriage by aircraft in air commerce of persons or property in accordance

with part 121 and scheduled air operations pursuant to part 135 of Title 14 of the Code of Federal

Regulations.

The bill states that a portion of the distribution to the State Aviation Fund can be used for admin-

istrative costs of the division and that all expenditures made should be in accordance with budg-

ets approved by the Department of Transportation, instead of the Department of Finance and

Administration. Balances in the fund would not revert to any other fund.

Deductions

The bill would eliminate time limits on gross receipts and compensating tax deductions available

to receipts from the sale of fuel sold to commercial aviation operators, leaving the deduction rate

at 55 percent, instead of the phased-down amount of 40 percent, which would have started after

June 30, 2007.

The effective date for the provisions of this bill is July 1, 2005.

Synopsis of SCORC Amendments

The Senate Corporations and Transportation Committee amended Senate Bill 75. The amend-

ments strike the term “state owned” as it related to the airports and related facilities. Another

Senate Bill CS/75/aSCORC -- Page 3

amendment would provide that, as it relates to any reimbursement for planning, construction,

equipment, materials and maintenance of airports and related facilities; collections by the divi-

sion for aircraft registration pursuant to the Airport Registration Act; and payments to the divi-

sion pursuant to Sections 64-1-13, 64-1-13.1 and 64-1-19 NMSA 1978 to the State Aviation

Fund, the “Balances in the fund shall not be transferred and shall not revert to any other fund”.

FISCAL IMPLICATIONS

Direct Impacts

The total fiscal impact of the committee substituted bill, as per DOT’s analysis, would be -$205

thousand to the General Fund in FY06. This amount takes into account the appropriations to the

State Aviation Fund of $246 thousand as well as an increase of $41 thousand due to the effective

removal of a subsidy on private jet components, according to DOT (see detail below).

DOT notes that the Aviation Fund impact includes $145.4 thousand from jet fuel gross receipts

tax, and a phased-in diversion of General Fund gross receipts tax amounting to $246 thousand

for a total of $391 thousand in FY06, $840 thousand in FY07, and $3,000 thousand in FY08.

The General Fund impact includes $41 thousand from jet fuel gross receipts tax, and the negative

impact of the phased-in diversion of General Fund gross receipts tax to the Aviation Fund

amounting to $246 thousand, for a total of -$205 thousand in FY06, $840 thousand in FY07, and

$3,000 thousand in FY08.

The local government impact is attributable to increased gross receipts tax on jet fuel used by

“non-commercial” airplanes (generally private corporate turboprops and jets).

Indirect Impacts

According to an analysis provided by DOT, the bill presents an unusual and rather extraordinary

example of a proposal where the economic feedback effects might be taken into consideration

and weighed against the direct (“static”) revenue impact of the proposal. The principal goal of

the bill is to attract additional Federal Aviation Administration funds to New Mexico to be used

for airport construction projects. With an additional dedicated revenue source, the Aviation Di-

vision believes New Mexico could attract up to $30 million in additional FAA funds. Airport

construction projects can be financed using 95 percent FAA funds, 2.5 percent state funds, and

2.5 percent local funds, so a modest amount of state money can leverage a significantly large

amount of construction activity. Simply stated, when the General Fund gross receipts tax rate

imposed on a construction project (3.775% in municipal areas) is greater than the state matching

funds contribution to the project (2.5%), there is a potential to make more money back than is

spent on the project.

DOT notes that the actual fiscal impact and revenue feedback effects of the bill are not exactly as

simple as suggested above, but the concept behind the bill is simple and straightforward. This

FAA funding is probably the only area in which the state can expect a 38 to 1 match ratio, and

since the funds can only be used for airport construction, there is a significant economic stimulus

from the construction activity financed by the new outside (FAA) money.

The Department of Transportation economist and revenue estimator has consulted with the Avia-

Senate Bill CS/75/aSCORC -- Page 4

tion Division regarding the expected costs of administration and the flow of funds into construc-

tion projects, and has concluded there will be significant revenue generated for the State General

Fund as a result of additional construction activity attributable to the attraction of additional FAA

funds to New Mexico. Under the scenario proposed by the Aviation Division, additional airport

construction projects could be undertaken as follows: $3.7 million in FY06, $11.4 million in

FY07, and $35.7 million (or possibly more) in FY08 and subsequent years.

Additional construction activity, financed by additional federal funds, represents an “injection”

into the New Mexico economy that serves as an economic stimulus, so long as the construction

activity continues. Since this particular federal funding source represents a recurring source of

funds, the additional airport construction would be a recurring activity, and the stimulative affect

on the state’s economy would be of a long-run nature and not just a “one-time deal”.

Using what the DOT economist considers to be “quite straightforward and modest” assumptions,

DOT reports expected revenue benefits to the State General Fund attributable to the increased

airport construction to be as follows:

General Fund Revenue from Additional Airport Construction

($ thousands)

1st Round GRT on 2nd Round GRT on Personal Income Tax on Total Additional

Fiscal Year Airport Construction 50% of FAA Money Additional Taxable Income General Fund Revenue

FY2006

139

66

176

381

FY2007

429

189

503

1,121

FY2008

1,347

566

1,510

3,424

FY2009

1,347

566

1,510

3,424

Notes:

•

General Fund GRT rate of 3.775% assumed (within municipal jurisdiction).

•

Earnings (wage income) multiplier of 1.97 applicable to highway construction would also

be applicable to airport construction – DOT cites the BEA/RIMS model as the source of

the 1.97 multiplier.

•

2nd round GRT imposed on 50% of FAA (additional) money: given a multiplier of about

2, and since the 1st round is fully-taxable construction, the 2nd round GRT impact repre-

sents general spending of personal income. Since not all spending is subject to GRT, it

was assumed that perhaps 50% of those expenditures might be subject to GRT.

•

Personal Income Tax: the new FAA money times the multiplier of 1.97 was assumed to

be additional Adjusted Gross Income. Taxable income was assumed to be 73% of AGI,

and the average tax rate on taxable income was assumed to be 3.5%. The 73% taxable

income assumption and the 3.5% tax rate assumption have been confirmed by economists

at the Taxation & Revenue Department.

Net General Fund Impact:

DOT suggests that if this airport construction impact is added to the “Static” Fiscal Impact Esti-

mate, the net result is positive for the State General Fund.

Senate Bill CS/75/aSCORC -- Page 5

Net General Fund Revenue (“Static” + Construction)

Fiscal Year

“Static” Fiscal

Impact Estimate

Additional Construction

General Fund Revenue

Net General Fund

FY2006

(205)

381

176

FY2007

(799)

1,121

322

FY2008

(2,959)

3,424

465

FY2009

(2,959)

3,424

465

LFC staff requested that the Department of Finance and Administration conduct an analysis of

this proposal using the REMI model.

Legislative Finance Committee staff requested that the Department of Finance and Administra-

tion conduct an analysis of this proposal using the REMI model. Preliminary results from the

REMI model indicate similar but slightly weaker General Fund revenue feedback attributable to

Personal Income Tax, and considerably stronger revenue feedback attributable to Gross Receipts

Tax. The net revenue feedback to the General Fund in the REMI analysis appears to be about 50

percent stronger than the numbers shown above (i.e., about $600 thousand net positive FY07 and

FY08) and increasing in subsequent years.

The REMI model was purchased by the state to evaluate the dynamic impact of certain fiscal is-

sues. Analysis is developed based on agreed assumptions made by state revenue estimators. At

this time, LFC staff consider the assumptions used in DOT’s analysis to be reasonable because

the positive dynamic impacts result from new dollars flowing into the state and because modest

feedback effects were used to develop the estimate.

OPJ/lg:rs