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

SPONSOR Lujan

DATE TYPED 10/12/05 HB 10/aSFC/aCC

SHORT TITLE 2005 Tax Rebates and Rate Cut

SB

(REVISED)

ANALYST Francis

APPROPRIATION

Appropriation Contained Estimated Additional Impact Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY05

FY06

$500

Non-recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to SB17,HB19,HB10

REVENUE

Estimated Revenue

Subsequent

Years Impact

Recurring

or Non-Rec

Fund

Affected

FY05

FY06

FY07

($107,700)

Non-Recurring General Fund

($74,600)

($34,200)

Rec/Non-Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Legislative Council Service (LCS)

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Conference Report

The conference committee on House Bill 10 revised the Senate Finance Committee amendments

to HB10.

House Bill 10/aSFC/aCC (Revised) -- Page 2

•

The first revision was to increase the amount of the rebate to $106.2 million, remove the

cap and set the income thresholds to adjusted gross income rather than taxable income.

•

The final revision was to remove the gross receipts tax holiday.

SUMMARY OF BILLS

FY06 Impacts

House

Bill 10

SFC

Amendments Conference

Rebate

75.5

$

57.2

$

106.2

$

Rebate Exemption

0.3

1.5

2005 Rate Cut

40.2

40.4

2006 Rate Cut

34.2

34.2

GRT Holiday

5.9

Taxation and Revenue Departmen

0.5

0.5

0.5

Total

$76.00

$138.25 $182.80

Synopsis of SFC Amendments

1. Rebate check for taxpayers. This amendment provides a rebate check for all taxpayers

who have a taxable income less than the top personal income tax bracket that ensures that low

income tax filers receive relief for the high cost of gas and heating. This is different from the

rebate in the original bill by making the basis for the rebate taxable income rather than adjusted

gross income (AGI). The schedule of rebates has changed as well (see table below). The cut-off

for the rebate is $24,000 in taxable income for married individuals filing jointly and heads of

household, $12,000 for married individuals filing separately, and $16,000 for single individuals.

Taxable income is the AGI less deductions and exemptions. The standard deduction in tax year

2004 was $4,850 for singles, $9,700 for married filing jointly and $7,150 for heads of household

and the personal exemption was $3,100 per exemption. Hence, a married couple with two kids

would have deductions and exemptions of at least $22,100 in deductions and exemptions. If that

same couple earned $45,000 in wages and salaries and had no other income or adjustments to

income, their taxable income would be $22,900 and fall below the cut-off of $24,000.

2a. Reduce the top personal income tax rate to 5.7% in tax year 2005. The current rate

for tax year 2005 is 6.0% and this amendment would lower that to 5.7% for the entire year.

Since taxpayers have been withholding and/or estimating taxes based on the 6.0% rate, they will

receive a refund when they file their 2005 tax returns in 2006. Only those subject to the top in-

come tax rate will see the refund. The top income tax bracket is $24,000 in taxable income for

married individuals filing jointly and heads of household, $12,000 for married individuals filing

separately, and $16,000 for single individuals.

2b. Reduce the top personal income tax rate to 5.3% in tax year 2006. Current law sets

the top personal income tax rate at 5.8% for tax year 2006. This amendment will reduce that to

5.3%, in effect accelerate the phase-in schedule of the 2003 personal income tax rate cuts. Since

it is effective January 1, 2006, taxpayers subject to the top rate will see an immediate decline in

their withholding amounts.

House Bill 10/aSFC/aCC (Revised) -- Page 3

3. Three-day gross receipts tax holiday for retail purchases of less than $500 per unit.

This amendment allows for a gross receipts tax holiday for retail purchases on the first weekend

in December (December 2-4, 2005). It would be similar to the August back-to-school tax holi-

day but allows more items to be purchased tax-free.

4. Make the tax rebate exempt from state personal income taxes. This amendment ex-

empts the rebate received from state personal income taxes. It will still be subject to federal per-

sonal income taxes.

Synopsis of Original Bill

House Bill 10 sets up a rebate on the personal income tax to be mailed out immediately to all

taxpayers by the secretary of the Taxation and Revenue Department (TRD). The intent of the

rebate is to mitigate the recent high costs of gasoline and the expected increases in the cost of

heating this winter. The rebate decreases as income rises and increases as family size increases.

The rebate is paid to any resident who files an individual NM income tax return and is not a de-

pendent of another individual, who was not an inmate of a public institution for more than six

months during tax year 2004 and was a resident on the last day of 2004. Additionally, residents

who do not receive rebates can claim it on their 2005 tax return provided they were not an inmate

of a public institution for more than six months in 2005 and were residents as of the last day of

tax year 2005.

FISCAL IMPLICATIONS

REVENUE IMPACT

FY06 ($M) FY07 ($M)

Rebate

106.2

$

Rebate Exemption

1.5

2005 Rate Cut

40.4

2006 Rate Cut

34.2

34.2

Total

182.3

$

34.2

$

APPROPRIATIONS IMPACT

FY06 ($M) FY07 ($M)

Taxation and Revenue Department

0.5

$

Total

0.5

$

-

$

Rebate to all tax filers. The bill establishes a $106.2 million rebate that increases with family

size and decreases with income. The minimum amount of rebate is $64 for a single filer with

over $60,000 in adjusted gross income; the maximum amount of rebate is $289 for a family of

six earning less than $10,000 in adjusted gross income. The average rebate is $125 per return.

House Bill 10/aSFC/aCC (Revised) -- Page 4

Number of exemptions:

But not over:

1

2

3

4

5

6

$0 $10,000 $139 $179 $214 $244 $269 $289

$10,001 $20,000 $124 $164 $189 $214 $234 $249

$20,001 $35,000 $109 $139 $164 $184 $199 $209

$35,001 $45,000

$94 $119 $139 $154 $164 $169

$45,001 $60,000

$79 $104 $124 $139 $149 $154

$60,001 No Limit $64

$84

$99 $109 $114 $119

Adjusted Gross Income:

Using TRD estimates, the cost of the rebates is $106.2 million in direct payments administered

by the secretary of the Taxation and Revenue Department and $500 thousand in appropriation for

the administration of the payments. Though the bill does not state it explicitly the assumption is

that the appropriation for the rebate is out of the general fund.

The rebate is designed to provide all taxpayers with some relief. It is weighted towards larger,

low income families. The minimum rebate is $64 while the maximum is $289. The rebate is

based on adjusted gross income and exemptions declared on the 2004 returns.

Changes from the original HB10: the rebate has increased from $75.5 million to $106.2 million

and the average rebate went up to $125. In the original HB10, 60% of the rebates went to those

under $35,000 and in the conference report version 72% goes to those under 35,000 or the same

amount that went to these tax filers under House Bill 19.

Using TRD estimates, two-thirds of the rebates will go to taxpayers who have less than $35,000

in adjusted gross income (see chart).

Distribution of Rebates

0%

10%

20%

30%

< 10k 10-20k 20-35k 35-45k 45-60k > 60k

Adjusted Gross Income

Fiscal impacts were estimated using information from personal income tax returns. The follow-

ing adjustments were made to reflect various provisions of the proposal:

• Non-resident taxpayers were excluded;

• Inmates of public institutions were excluded; and

• An estimate of the number of new taxpayers moving into the state during 2005 was added to

the population of resident taxpayers from the previous year.

Fiscal Impact of Exempting Rebates

The estimate in making the rebates exempt from state taxation is $1.4 million. This ensures that

House Bill 10/aSFC/aCC (Revised) -- Page 5

the rebates are not subject to state personal income taxes though they will still be subject to fed-

eral income taxes.

Fiscal Impact of Rate Reductions

Top Tax Rate

CY05

CY06

Current Law

6.0%

5.8%

HB 10 Conference

5.7%

5.3%

1. Reduce top rate to 5.7% in tax year 2005. Reducing the top rate is estimated to reduce

PIT collections by $40.2 million in FY06. Since this is a retroactive rate reduction, the entire

impact is in FY06. It is unclear whether the reduction in the top rates should be considered recur-

ring or non-recurring since there was already a phase-in schedule in place. TRD has assumed

these to be recurring.

All of the benefits of the reduction go to those taxpayers in the top taxable income bracket as

identified in the tables above. It should be noted that these tax rate reductions were already be-

ing phased-in and assumed in revenue projections.

2. Reduce top rate to 5.3% in tax year 2006. Reducing the top rate is estimated to reduce

PIT collections by $68.4 million, $34.2 million in FY06 and $34.2 million in FY07. The tax

year follows the calendar year and so any impacts are spread over two fiscal years. It is assumed

that the impacts are spread evenly.

It is unclear whether the reduction in the top rates should be considered recurring or non-

recurring since there was already a phase-in schedule in place. TRD has assumed these to be re-

curring.

All of the benefits of the reduction go to those taxpayers in the top taxable income bracket as

identified in the tables above. It should be noted that these tax rate reductions were already be-

ing phased-in and assumed in revenue projections.

ADMINISTRATIVE IMPLICATIONS

To process the rebates, TRD has estimated that this will cost $500 thousand to process and dis-

tribute the rebates to taxpayers. TRD expects they can complete the job and have all of the re-

bates mailed out by December 15

th

, 2005.

The advanced payment provisions of the proposal will require the Taxation and Revenue De-

partment to incur expenses associated with identifying eligible taxpayers and their appropriate

advanced payment amount, and also with mailing the advanced payments. The proposed appro-

priation should be sufficient to accommodate the impacts of the requirements on the Depart-

ment’s budget.

NF/yr