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F I S C A L I M P A C T R E P O R T
SPONSOR Silva
ORIGINAL DATE
LAST UPDATED
1/28/06
2/1/06 HB 276
SHORT TITLE Electrical Power Plant Property Valuation
SB
ANALYST Francis
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY06
FY07
FY08
NFI
*see narrative
(Parenthesis ( ) Indicate Expenditure Decreases)
Relates to HB 276, SB 332
SOURCES OF INFORMATION
LFC Files
Taxation and Revenue Department (TRD)
Energy Minerals and Natural Resources Department (EMNRD)
Response Received From
Taxation and Revenue Department (TRD)
SUMMARY
Synopsis of Bill
House Bill 276 modifies the valuation methodology for property used in the generation, distribu-
tion or transmission of electricity. The valuation can include deductions for “functional” and
“economic” obsolescence.
Economic obsolescence is defined as the loss of value caused by unfavorable economic
influences or factors not including physical depreciations.
Functional obsolescence is loss due to functional inadequacies or deficiencies caused by
factors within the property not including physical depreciation.
The taxpayer choosing to include economic and/or functional obsolescence must submit a claim
documenting the obsolescence. Such documentation may include industry comparisons, volume
reductions, and other objective evidence of obsolescence. The Taxation and Revenue Depart-
ment (TRD) will determine if the evidence is sufficient and notify the taxpayer if a claim is
pg_0002
House Bill 276 – Page
2
rejected with the reasons and what additional information is needed to establish obsolescence,
giving a taxpayer enough time to comply.
A taxpayer is given a choice of valuation methods:
1.
capitalization of income
2.
market value of stock
3.
cost less allowance for obsolescence and depreciation.
Whichever method chosen the taxpayer must use that method for subsequent years unless, after
three years, the taxpayer can show sufficient cause to change methods.
This act is applicable to property tax years 2007 forward.
FISCAL IMPLICATIONS
There is no significant general fund impact though there may be significant impacts in counties
where there are electrical generating plants. There is no precise way to determine the impact of
this modification to the valuation methodology. Since there is a choice of methods, the likely
result is that property valuation will be lower in the future.
For an analysis regarding obsolescence in valuing pipelines (HB375), TRD reports that because
of the way the property tax rates are set, there is no impact but rather the rates will be adjusted
for all taxpayers as the proportions of valuation changes. The millage rates for property taxes are
set according to the need (for debt service, etc) so the rates adjust for all taxpayers to ensure that
the same total amount of revenue is generated. This is the “yield control” provision of property
tax rate setting. TRD has estimated the amount of property taxes that would shift to other tax-
payers at $9 million.
In the pipeline analysis (HB375), TRD reasons that the cost approach remains the most valid
method of appraisal in that the other methods require too much subjective analysis that exposes
the department to litigation with valuation experts on both sides without adding substantial accu-
racy in valuation.
ADMINISTRATIVE ISSUES
TRD reported that to adequately value the oil and gas pipelines using the proposed method and
to come up with regulations and standards for obsolescence they would require additional FTEs.
TRD: The proposal would substantially increase the Department's Property Tax Division (“Divi-
sion”) costs of administering the property tax system. The Division currently performs approxi-
mately 14 unitary appraisals annually. Performing unitary valuations on transmission and distri-
bution facilities would increase this figure substantially and require approximately two additional
full-time employees to perform at a cost of approximately $116,000 including salaries, benefits,
equipment, travel and similar expenditures. The Department would also probably incur substan-
tial legal costs associated with litigation that would likely result from enactment of the proposed
legislation. This issue is also discussed in the "Other Issues" section of this report.
pg_0003
House Bill 276 – Page
3
OTHER ISSUES
TRD:
Potential Fiscal Impacts of The Proposed Legislation
As shown in the table below, taxable value among properties of the type that would be affected
by the proposed statute currently totals approximately $1.1 billion. The $1.1 billion total repre-
sents roughly three percent of the $38.5 billion in net taxable value of all New Mexico proper-
ties. If it is assumed that unitary valuation would, on average, decrease net taxable value of elec-
trical generating properties by 30 percent, the resulting loss in value would total approximately
$342 million. Multiplying loss of value in all affected counties by the average nonresidential
property tax rate in each of the counties and summing suggests a revenue loss on the order of $9
million – assuming no change in rates. Rates would increase, however, through a number of
mechanisms, including the state's "yield control" statute (Section 7-37-7.1 NMSA 1978), discre-
tionary rate increases imposed by governing bodies of property tax recipients, and essentially
automatic adjustment in rates that service outstanding debt. Essentially all groups of property
tax payers would be affected in some way, although the effects would, in most cases, be rela-
tively minor. Property tax obligations in New Mexico currently total approximately $1 billion.
Hence the approximate $9 million impact represents slightly under one percent of total statewide
property tax obligations.
Illustration: Potential Fiscal Impacts of HB-276
Net Taxable Value:
Electric
Electric Electric Electric
% of Total
County
Utilities
Generating Transmission Co-Ops Total Electric Electric
Bernalillo
109,188,123 11,141,107
0
879,858 121,209,088
10.6
Catron
4,944,533 5,722,218
0 3,601,956 14,268,707
1.2
Chaves
16,736,415
8,527
0 7,058,446 23,803,388
2.1
Cibola
987,651 1,870,259
0 4,675,863
7,533,773
0.7
Colfax
0 2,477,675
0 3,736,824
6,214,499
0.5
Curry
9,966,972 913,333
0 6,693,724 17,574,029
1.5
DeBaca
2,546,179
0
0 2,187,423
4,733,602
0.4
Dona Anna
94,755,307 577,253
0
0 95,332,560
8.3
Eddy
30,453,725
0
0 11,715,530 42,169,255
3.7
Grant
8,918,128 700,653
0
400,168 10,018,949
0.9
Guadalupe
2,594,237
0
0 2,865,279
5,459,516
0.5
Harding
0
49,919
0
742,968
792,887
0.1
Hidalgo
4,338,114 33,788,600
0 1,871,010 39,997,724
3.5
Lea
44,910,596
0
0 6,992,116 51,902,712
4.5
Lincoln
3,640,878
25,667
0 5,811,989
9,478,534
0.8
Los Alamos
81,474
0
0
0
81,474
0.0
Luna
7,875,615 7,970,695
0 2,803,537 18,649,847
1.6
McKinley
2,803,743 69,286,771
0 3,471,625 75,562,139
6.6
Mora
0 190,033
0 2,349,565
2,539,598
0.2
Otero
11,086,559 2,099,912
0 6,323,726 19,510,197
1.7
Quay
2,502,068
0
60 4,449,533
6,951,601
0.6
Rio Arriba
2,224,403 7,510,387
0 13,123,371 22,858,161
2.0
Roosevelt
13,888,058
0
0 6,622,257 20,510,315
1.8
San Juan
136,779,349 249,429,944 376,510 1,557,169 388,142,972
34.0
pg_0004
House Bill 276 – Page
4
San Miguel
4,199,388 315,652
0 3,321,133
7,836,173
0.7
Sandoval
24,957,271 4,497,422
0 5,678,326 35,133,019
3.1
Santa Fe
27,032,383
40,709
0 4,225,897 31,298,989
2.7
Sierra
3,495,996 1,689,168
0 2,747,361
7,932,525
0.7
Socorro
692,828 2,313,313
0 5,052,743
8,058,884
0.7
Taos
0 2,559,758
0 13,130,593 15,690,351
1.4
Torrance
314,008 1,352,886
0 9,287,147 10,954,041
1.0
Union
942,050 1,309,414
0 3,415,799
5,667,263
0.5
Valencia
14,070,445 113,892
0
404,853 14,589,190
1.3
Totals
586,926,496 407,955,167 376,510 147,197,789 1,142,455,962 100.0
Illustration: Potential Fiscal Impacts of HB-276 (continued)
Total
Electric Estimated
Estimated
Net Taxable % of Total Loss In % of Total Loss/Shift
County
Value Assessed Taxable Value* Assessed In Obligations**
Bernalillo
11,002,745,292
1.1
36,362,726
0.3
1,446,489
Catron
79,816,454
17.9
4,280,612
5.4
53,973
Chaves
789,734,022
3.0
7,141,016
0.9
194,055
Cibola
226,421,527
3.3
2,260,132
1.0
71,349
Colfax
484,149,148
1.3
1,864,350
0.4
41,217
Curry
447,626,964
3.9
5,272,209
1.2
121,668
DeBaca
37,354,701
12.7
1,420,081
3.8
37,951
Dona Anna
2,532,509,902
3.8
28,599,768
1.1
890,382
Eddy
2,142,990,148
2.0
12,650,777
0.6
247,998
Grant
506,896,825
2.0
3,005,685
0.6
69,733
Guadalupe
92,320,166
5.9
1,637,855
1.8
52,250
Harding
28,424,729
2.8
237,866
0.8
5,363
Hidalgo
117,164,432
34.1
11,999,317
10.2
260,023
Lea
2,056,750,177
2.5
15,570,814
0.8
422,104
Lincoln
686,219,982
1.4
2,843,560
0.4
69,810
Los Alamos
651,053,050
0.0
24,442
0.0
493
Luna
321,253,366
5.8
5,594,954
1.7
121,701
McKinley
605,214,520
12.5
22,668,642
3.7
817,441
Mora
71,229,738
3.6
761,879
1.1
21,399
Otero
678,279,824
2.9
5,853,059
0.9
168,329
Quay
116,307,543
6.0
2,085,480
1.8
55,553
Rio Arriba
1,548,239,274
1.5
6,857,448
0.4
152,489
Roosevelt
228,795,110
9.0
6,153,095
2.7
134,138
San Juan
3,653,126,771
10.6 116,442,892
3.2
2,799,852
San Miguel
394,907,217
2.0
2,350,852
0.6
72,245
Sandoval
1,791,689,224
2.0
10,539,906
0.6
304,434
Santa Fe
4,887,341,480
0.6
9,389,697
0.2
237,652
Sierra
201,271,893
3.9
2,379,758
1.2
57,881
Socorro
178,138,033
4.5
2,417,665
1.4
74,428
Taos
833,527,532
1.9
4,707,105
0.6
87,901
Torrance
236,306,231
4.6
3,286,212
1.4
78,437
Union
101,033,556
5.6
1,700,179
1.7
37,296
Valencia
820,258,796
1.8
4,376,757
0.5
135,692
Totals
38,549,097,626
3.0 342,736,789
9,341,725
pg_0005
House Bill 276 – Page
5
*30% of Total Electric ** Estimated loss in assessed value multiplied by weighted average nonresidential property
tax rates.
Unitary Assessment – Administrative issues
The existing special method of valuation, Section 7-36-29, requires property used in the genera-
tion, transmission or distribution of electrical power to be valued on a cost basis. Section 7-36-29
as it is now codified presents few administrative problems for either the taxpayer or the Depart-
ment. The property’s cost and depreciation figures for reporting for NM property tax purposes
come directly from the records that the taxpayer is required to maintain for either the state or
federal regulators. The Department can easily verify these figures.
HB 276 allows the taxpayer an election of valuation methods: a unitary basis, employing the cost
method, capitalization of income method or market value of stock and debt approach or any
combination of methods. While unitary valuations and the income and stock and debt methods
of valuation are all well-accepted appraisal techniques, their complexity may outweigh their
benefit in terms of yearly valuations for property tax assessments. These proposed valuation ap-
proaches open the door to numerous judgment calls and the frequent exercise of discretion. This
results in challenges to the valuations. Historically, each year, taxpayers protest roughly all of the
unitary valuations. In contrast, less than 10% of all other valuations are protested. Case law illus-
trates how almost every factor used in the unitary method is subject to dispute and controversy.
The unitary method raises subjective judgment issues when forecasting future income, the dura-
tion of the income, the capitalization rate and the method of capitalization. Unitary valuations
rely on the efficiency of the financial market and the ability to forecast the financial future.
Judgment calls must be made concerning trading volumes and bid/ask spreads for the stock sales.
In addition, to accurately develop a unitary value, the company being valued must be engaged in
only the primary business for which the property is used. This rarely occurs in the energy indus-
try.
The reasons that the original drafters chose the cost approach for the special method of valuation
for the electrical industry remain as valid today as they were in the past. The cost method pro-
vides a relatively easy, accurate picture of the property annually. The sponsors of HB 276 have
not presented any evidence that the cost method is not generating fair values for tax purposes.
The proposed amendment will not aid the Department. HB 276 provides the taxpayer with more
valuation options and vests in the taxpayer the choice of what valuation method it wants to use.
Taxpayers will naturally choose the method that minimizes the property tax burden.
The use of “shall” throughout the proposed subsection labeled “C(1)(2)(3) [pages 3-5] creates a
presumption in favor of a taxpayer electing to switch valuation methods. The taxpayer may exer-
cise this choice if it has experienced a “substantial adverse effect” as a result of the implementa-
tion of law and regulation. “Substantial adverse effect” is not defined in the proposed amend-
ment, but it is obvious that it means a property value that is higher than the taxpayer thinks it can
achieve under a different valuation method. The proposal conflicts with appraisal principles in
that it allows the owner, rather than a supportable appraisal, to establish the property’s value.
(This ‘valuation election option’ is not new to the Property Tax Code. The language found in HB
276 at C(1)(2)(3) corresponds to the provision in Section 7-36-30(C), the special method of
valuation for communication systems. The ‘valuation election option’ has not yet been tested in
a New Mexico property tax protest proceeding or district court refund claim.)
Both the Department’s and the counties’ administrative burdens will increase if the proposed
pg_0006
House Bill 276 – Page
6
amendments become law. Not only will the Department need to hire more appraisers to perform
complex unitary valuations, but also, each valuation of electric generation and transmission
property has the potential of becoming a battle of the experts. The Department will provide the
initial unitary appraisal and the front line defense to the challenges to the valuation, while the
counties will suffer from delays in tax revenue while protests wind their way through the courts.
Revenue forecasting will have to adjust to the potential that taxpayers will switch valuation
methods every few years in order to achieve lower values.
Finally HB 276, subsections I and J, attempt to shift from the taxpayer to the Department the re-
sponsibility that the taxpayer has traditionally had to prove its entitlement to a deduction from
value. The proposed language requires the Department to respond in writing to taxpayer’s obso-
lescence claims in the valuation rendition. The bill assigns to the Department the task of defin-
ing for the taxpayer how the taxpayer is to establish a deduction for obsolescence. The Depart-
ment becomes responsible for analyzing the taxpayer’s obsolescence claim and detailing how it
is to be proven.
It is therefore the Department's view that the proposed changes to the special method of valua-
tion now found at Section 7-36-29:(1) are not supported by administrative need or sound tax pol-
icy; (2) would create serious administrative burdens for both the Department and counties; and
(3) would reduce revenue and/or shift property tax burdens from the beneficiaries of the proposal
to other taxpayers.
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
HB 276 relates to HB375 and SB332 as far as proposing to use functional and economic obso-
lescence as a factor for valuation. HB 276 refers to electrical transmission property where the
other two bill refer to oil and gas transmission property..
NF/mt:yr