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F I S C A L I M P A C T R E P O R T
SPONSOR Altamirano
DATE TYPED 3/02/2005 HB
SHORT TITLE Military Pension Income Tax Exemption
SB 349/aSCTC/aSJC
ANALYST Taylor
REVENUE
Estimated Revenue
FY05
FY06
Subsequent
Years Impact
Recurring
or Non-Rec
Fund
Affected
($3,000.0) ($6,000.0)
(Similar) Recurring
General Fund
(Parenthesis ( ) Indicate Revenue Decreases)
Relates to HB 27, HB 50, SB94, SB 450
SOURCES OF INFORMATION
LFC Files
Taxation and Revenue Department (TRD)
Department of Military Affairs (DMA)
SUMMARY
Synopsis of SJC amendments
The Senate Judiciary Committee amendments strike the Senate Corporations and Transportation
Committee amendments that increased the income tax exemption for military retirement pension
income from 50 percent to 100 percent.
Fiscal Impact of SJC amendments
The Senate Judiciary Committee amendments change the fiscal impact of the bill back to the
original estimate: $3 million general fund revenue loss in FY05, and $6 million revenue loss in
FY06.
Synopsis of SCTC amendment
The Senate Corporations and Transportation committee (SCTC) amended HB 349 by making all
military retirement pension income exempt from state income taxes. The original bill exempted
50 percent of military retirement pension income.
pg_0002
Senate Bill 349/aSCTC/aSJC -- Page 2
Fiscal Impact of SCTC amendment
The amendment has the effect of doubling the fiscal impact. The full-year (FY06) impact of a
100 percent exemption would be a $12 million reduction in general fund revenues as compared
to the $6 million full year impact of exempting half of pension income. (See Fiscal implication
section for calculation methodology)
Synopsis of original bill
Senate Bill 349 exempts 50 percent of military retirement pensions from the Income Tax Act.
The stated purpose of the exemptions is to promote economic development. The bill is applica-
ble to tax years beginning on or after January 1, 2005.
FISCAL IMPLICATIONS
TRD’s fiscal impact analysis indicates that this bill would decrease state income tax revenues by
$ 3.0 million in FY05, $6.0 million in FY06 million and subsequent years. The full year esti-
mate assumes:
•
there are 21,300 military retirees in the state;
•
average annual pension is $17,650;
•
half of the pension, or $8,825 is exempt from state income taxes;
•
the average applicable tax rate is 3.2 percent
•
The average relief per eligible tax payer is $282 (multiply $8,825 by 3.2 percent)
•
The full year fiscal impact is a decrease of $6.0 million (Multiply $282 by 21,300 retir-
ees).
•
The lower impacts for FY05 reflects the fact that bill would be effective for half of FY05.
TRD’s tables reporting the number of military retirees and average monthly pay for all states is
attached (see page 3).
ADMINISTRATIVE IMPLICATIONS
TRD reports moderate administrative implications that can be handled with existing resources.
TECHNICAL ISSUES
The Department of Military Affairs reported that the following technical drafting issue: “Major
drafting errors in proposal Bill, combining and confusing military retirement compensation with
Veteran’s Affairs terminology of “pensions” and VA eligibility criteria”. The amendment pro-
posed by the department is attached (see page 5).
OTHER SUBSTANTIVE ISSUE
TRD analysis raises the following issues:
•
The measure encourages military retirees to move to New Mexico.
•
Individuals with incomes and other circumstances similar to people receiving the pro-
posed exemption are likely to view it as unfair, especially when they compete with the re-
tirees for jobs, and when the retirees are individuals with relatively high incomes. Ac-
pg_0003
Senate Bill 349/aSCTC/aSJC -- Page 3
cording to information the “military com” website (http://usmilitary.about.com/) military
retirement pay can be over $9,000 monthly for high-ranking officers retiring in 2004.
•
Reducing state income tax liability tends to increase federal income tax liability because
state income taxes are deductible against federal liability.
BT/lg:yr
Attachment
pg_0004
Senate Bill 349/aSCTC/aSJC -- Page 4
Illustration: Number of Retirees and Total Military Pay by State
Retirees By State*
State
Army
Navy Marine Corps Air Force Total DoD
Alabama
25,033 6,691 1,623 15,371 48,718
Alaska
2,761 652 133 4,302 7,848
Arizona
13,828 7,888 3,008 23,480 48,204
Arkansas
8,108 4,644 969 10,722 24,443
California
34,713 83,245 18,396 61,339 197,693
Colorado
16,586 5,299 1,299 21,640 44,824
Connecticut
3,006 4,986 584 2,166 10,742
Delaware
1,592 897 207 4,052 6,748
Dist. of Columbia 1,756 627 139 1,033 3,555
Florida
44,392 58,862 7,851 67,465 178,570
Georgia
40,385 11,109 3,421 21,094 76,009
Guam, MI
614 783 76 482 1,955
Hawaii
5,558 3,965 979 3,654 14,156
Idaho
2,554 2,511 480 4,802 10,347
Illinois
10,283 8,012 1,848 12,079 32,222
Indiana
8,947 4,421 1,377 6,396 21,141
Iowa
3,736 2,528 584 3,026 9,874
Kansas
9,014 2,943 788 6,446 19,191
Kentucky
14,033 3,442 944 4,959 23,378
Louisiana
9,531 4,921 1,337 11,159 26,948
Maine
2,898 4,004 511 3,681 11,094
Maryland
16,835 12,810 2,063 12,322 44,030
Massachusetts 7,406 5,798 1,314 6,412 20,930
Michigan
9,336 6,266 1,562 8,077 25,241
Minnesota
5,515 3,907 832 4,854 15,108
Mississippi
7,344 5,708 921 10,227 24,200
Missouri
13,078 6,850 2,078 11,222 33,228
Montana
1,911 1,516 360 3,223 7,010
Nebraska
2,336 1,798 340 7,886 12,360
Nevada
4,808 5,669 1,449 12,816 24,742
New Hampshire 2,828 2,087 436 4,037 9,388
New Jersey
10,028 5,386 1,226 5,423 22,063
New Mexico
5,516 2,928 723 11,144 20,311
New York
14,443 8,307 2,319 10,536 35,605
North Carolina 30,979 11,599 10,214 17,671 70,463
North Dakota
960 436 66 2,239 3,701
Ohio
12,226 8,036 2,348 17,921 40,531
Oklahoma
13,229 4,494 1,134 14,149 33,006
Oregon
5,883 6,759 1,358 6,689 20,689
Pennsylvania
18,018 11,686 3,251 12,148 45,103
Puerto Rico
7,539 415 131 942 9,027
Rhode Island
1,406 3,177 246 932 5,761
South Carolina 17,707 12,548 2,858 16,248 49,361
South Dakota
1,513 792 132 2,978 5,415
Tennessee
18,744 9,979 2,374 12,254 43,351
Texas
65,305 23,760 6,258 77,830 173,153
Utah
3,321 1,805 431 5,875 11,432
Vermont
1,424 679 142 1,027 3,272
Virginia
39,097 47,543 7,841 25,641 120,122
Virgin Islands
183 49 6 44 282
Washington
22,706 21,840 2,252 20,481 67,279
West Virginia
3,889 2,208 684 2,889 9,670
Wisconsin
6,580 4,025 963 4,906 16,474
Wyoming
985 715 135 2,309 4,144
Other
10,486 5,553 883 8,707 25,629
Total
642,892 469,558 105,884 651,407 1,869,741
*As of September 30, 1999
pg_0005
Senate Bill 349/aSCTC/aSJC -- Page 5
Retired Military Monthly Pay** By State (In Thousands)
State
Army Navy Marine Corps Air Force Total DoD
Alabama
35,542 8,086 2,075 22,048 64,752
Alaska
3,088 765 122 5,273 9,248
Arizona
19,140 10,203 4,226 35,871 69,441
Arkansas
9,159 5,575 1,147 14,220 30,101
California
43,382 113,119 27,044 93,177 276,722
Colorado
23,403 7,167 1,715 37,311 69,596
Connecticut
3,136 6,609 517 2,680 12,941
Delaware
1,839 1,037 232 5,403 8,513
Dist. of Columbia 2,100 899 138 1,220 4,357
Florida
44,392 58,862 7,851 67,465 263,126
Georgia
40,385 11,109 3,421 21,094 101,102
Guam, MI
614 783 76 482 2,329
Hawaii
5,558 3,965 979 3,654 20,332
Idaho
2,554 2,511 480 4,802 13,541
Illinois
10,283 8,012 1,848 12,079 39,076
Indiana
8,947 4,421 1,377 6,396 23,671
Iowa
3,736 2,528 584 3,026 10,393
Kansas
9,014 2,943 788 6,446 25,013
Kentucky
14,033 3,442 944 4,959 27,745
Louisiana
9,531 4,921 1,337 11,159 33,481
Maine
2,898 4,004 511 3,681 13,360
Maryland
16,835 12,810 2,063 12,322 64,021
Massachusetts
7,406 5,798 1,314 6,412 22,815
Michigan
9,336 6,266 1,562 8,077 26,787
Minnesota
5,515 3,907 832 4,854 16,238
Mississippi
7,344 5,708 921 10,227 29,469
Missouri
13,078 6,850 2,078 11,222 40,180
Montana
1,911 1,516 360 3,223 8,759
Nebraska
2,336 1,798 340 7,886 16,926
Nevada
4,808 5,669 1,449 12,816 35,100
New Hampshire
2,828 2,087 436 4,037 12,786
New Jersey
10,028 5,386 1,226 5,423 24,918
New Mexico
5,516 2,928 723 11,144 29,861
New York
14,443 8,307 2,319 10,536 35,069
North Carolina
30,979 11,599 10,214 17,671 94,212
North Dakota
960 436 66 2,239 4,127
Ohio
12,226 8,036 2,348 17,921 47,831
Oklahoma
13,229 4,494 1,134 14,149 40,263
Oregon
5,883 6,759 1,358 6,689 25,538
Pennsylvania
18,018 11,686 3,251 12,148 52,869
Puerto Rico
7,539 415 131 942 6,544
Rhode Island
1,406 3,177 246 932 7,477
South Carolina
17,707 12,548 2,858 16,248 66,821
South Dakota
1,513 792 132 2,978 6,571
Tennessee
18,744 9,979 2,374 12,254 54,733
Texas
65,305 23,760 6,258 77,830 249,520
Utah
3,321 1,805 431 5,875 15,588
Vermont
1,424 679 142 1,027 3,784
Virginia
39,097 47,543 7,841 25,641 215,527
Virgin Islands
183 49 6 44 372
Washington
22,706 21,840 2,252 20,481 92,777
West Virginia
3,889 2,208 684 2,889 10,379
Wisconsin
6,580 4,025 963 4,906 17,141
Wyoming
985 715 135 2,309 5,283
Other
10,486 5,553 883 8,707 36,194
Total
642,892 469,558 105,884 651,407 2,535,320
**The monthly amount of payment (net pay) is before deductions for withholding taxes and allotments but after deductions for survi-
vor benefits.
Source: http://www.military.com/Resources/ResourceFileView.file=retirees_stats.htm#Monthly
pg_0006
Senate Bill 349/aSCTC/aSJC -- Page 6
Department of Military Affairs
Proposed Amendment
Section 1. Change the following from:
“[NEW MATERIAL] EXEMTION--MILTIARY RETIREMENT PAY.--For the purpose of promotion
economic development in New Mexico, an amount not to exceed fifty percent of military retirement pen-
sions received by a veteran during the taxable year is exempt from taxation. For the purposes of this sec-
tion, “veteran” means a person who has been honorably discharged from membership in armed forces of
the United States and has served in the armed forces of the United States on active duty continuously for
ninety days.”, to:
“[NEW MATERIAL] EXEMTION--MILITARY RETIREMENT PAY.—For the purpose of promoting
economic development in New Mexico, an amount not to exceed fifty percent of military retirement pay
received by a military retiree, whether from regular or non-regular military service, is exempt from taxa-
tion”.
DISCUSSION
The reason to omit the term “veteran” and “membership in the armed forces” is because neither
term are Title 10, or Title 32, military pay retirement status’; rather, such terms are veteran’s “status’s”, as
defined by Title 38 U.S.C. Section 101(2) and 38 C.F.R. Section 3.1(d)(2004). Unnecessary confusion is
thus created because Title 38 “veteran” status has nothing to do with military retirement pay that flows
from either Title 10 or Title 32 military service status, not a Title 38 veteran’s status that discusses vet-
eran’s benefits or disability rights. Similarly, the language that states a veteran is someone who… “has
served in the armed forces of the United States on active duty continuously for ninety days” is a veteran’s
law term for threshold eligibility for veteran’s pensions, as per 38 C.F.R. Section 3.3(a)(1)(i); (a)(2)(i)(ii)
and (iii). However, there is no longer a so-called “minimum period of active duty”, meaning 90-days of
active duty or even 181-days of active duty, to define veteran’s status eligibility. The current legal stan-
dard to define a “veteran” is either a “twenty-four month period of continuous active duty,” or the “full pe-
riod for which [the veteran] was called or ordered to active duty”, as per 38 U.S.C. Section 5303(A)(b); 38
C.F.R. Section 3.12(a)(1)(2004), such as in the case of a mobilized National Guardsmen for “365” or
“565” days. In any case, however, the proposed Bill has confused military retirement with veteran’s
status, which are wholly dissimilar concepts. Last, in this same regard, the proposed Bill speaks of “mili-
tary retirement pensions”: there is no such thing. There is either an earned military retirement pay, as per
Title 10 or Title 32, for years of service, or there is a veteran’s “pension”, as per Title 38, which coinciden-
pg_0007
Senate Bill 349/aSCTC/aSJC -- Page 7
tally requires a “ninety day period of continuous wartime service for non-service-connected disability-
based pension”, as per Title 38 U.S.C. Section 1512; 38 C.F.R. Section 3.3. The proposed Bill, however,
is fatally flawed as drafted for the reasons herein stated and otherwise need to be remedied.