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.

Current FIRs (in HTML & Adobe PDF formats) are a vailable on the NM Legislative Website (legis.state.nm.us).

Adobe PDF versions include all attachments, whereas HTML versions may not. Previously issued FIRs and

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

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

SPONSOR Anderson

ORIGINAL DATE

LAST UPDATED

1/24/06

1/30/06 HB 368

SHORT TITLE Armed Forces Salary Income Tax Exemption

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(5,500.0)

(11,000.0)

(11,000.0) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Duplicates SB 209

Relates to SB210, SB115, HB369, HB44 (Military Pension Exemption)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

House Bill 368 exempts salaries paid by the United States to persons actively serving in the

armed forces from the state income tax. The exemption is effective January 1, 2006, for the

2006 tax year.

FISCAL IMPLICATIONS

TRD: The $11 million fiscal impacts estimate assumes: 1) the average salary of military service

people is approximately $45,000 , 2) approximately 70% or $31,500 would be taxable after al-

lowance for present law exemptions and deductions, 3) approximately 7,000 New Mexico tax-

payers or roughly .5% of the 1.4 million total U.S. active service members receive the exemp-

tion, and 4) their average tax rate is 5%. The tax reduction to service members would be ap-

proximately $1,575 annually.

House Bill 368 – Page 2

Because the exemption takes effect in tax year 2006, 50 percent of the tax year 2006 impact

would accrue during FY 2006.

ADMINISTRATIVE IMPLICATIONS

Provisions of the proposed measure would impose relatively minor administrative impacts on the

Taxation and Revenue Department. Provisions of the proposal could be administered with re-

sources currently available to the Department.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

HB 368 is identical to SB 209. HB 368 relates to HB 44, SB 115, HB369 and SB 210, bills

which exempt military pensions from the state income tax.

TECHNICAL ISSUES

According to the Department of Defense, “Active Duty” refers to “Full-time duty in the active

service of a Uniformed Service, including fulltime training duty, annual training duty, and atten-

dance while in the active service at a school designated as a Military Service school by law or by

the Secretary concerned.”

TRD notes that, as written, the measure could be interpreted to include an exemption for federal

personal income tax obligations. It should be amended to clarify that it does not.

OTHER SUBSTANTIVE ISSUES

By reducing state tax obligations, the proposed measure would tend to increase federal tax liabil-

ity because state tax obligations are deductible against federal liability. Hence the net taxpayer

benefit would be less than the $1,575 per claimant mentioned above. The $1,575 in state tax sav-

ings would, for example, be reduced to $1,260 ($1,575 x .8) for a taxpayer in the 20% federal

tax bracket.

NF/mt:yr:mt