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

SPONSOR Lujan B

ORIGINAL DATE

LAST UPDATED

1/29/06

HB 465

SHORT TITLE Working Families Tax Credit

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(8,800.0)

(17,600.0)

(17,600.0) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

House Bill 465 amends the Income Tax Act to provide a Working Family Credit (WFC) for tax

filers with earned income. The WFC is equal to 7.5 percent of the existing federal Earned In-

come Tax Credit (EITC). It is a refundable credit meaning that if it exceeds the tax liability of

the tax filer, the balance is refunded to the filer. A tax filer can take advantage of this credit or

the Low Income Tax Comprehensive Tax Rebate (LICTR) but not both of them. The credit is

effective beginning with the 2006 tax year.

FISCAL IMPLICATIONS

Approximately 200 thousand New Mexicans file for the federal EITC each year. 270 thousand

New Mexicans take advantage of the LICTR. The two programs target different populations with

the EITC aimed more at families who have earnings from working while the LICTR assists more

people who have little or no earnings and it phases out pretty quickly as modified gross income

reaches $22 thousand. According to TRD, an estimated 135,000 tax filers will claim the new

state WFC with an average benefit of $130 per return.

House Bill 465 – Page

2

$87

$174

$111

$36

$130

$-

$20

$40

$60

$80

$100

$120

$140

$160

$180

0-10K

10-20K 20-30K 30-40K All Incomes

Average Benefit of WFC by Income

Source: TRD

Distribution of WFC Benefit

Single

Married

Filing Jointly

Head of

Household

Average

Benefit

0-10K

52

$

97

$

99

$

87

$

10-20K

144

188

173

174

20-30K

93

125

103

111

30-40K

36

38

33

36

All Incomes

87

134

135

130

Note: Married tax filers filing separate returns are ineligible for the EITC

Source: TRD

SIGNIFICANT ISSUES

Seventeen states, including the District of Columbia, currently offer a state level EITC (Colo-

rado’s EITC is tied to their TABOR rules and so some years they do not allow the credit). The

credit has proven to be a simple and efficient credit. It is also popular since it only goes to indi-

viduals and families with earned income. One of the key elements is the refundability of the

credit: the taxpayer receives the full amount of the credit regardless of the tax liability. Twelve

of the seventeen state EITCs are refundable, according to research at the Institute on Taxation

and Economic Policy. New York and Vermont have the most generous EITCs allowing over 30

percent of the federal credit and making it refundable. Rhode Island has a 25 percent credit but it

is not refundable which restricts its effectiveness.

House Bill 465 – Page

3

WORKING FAMILY CREDIT SUMMARY

Filing

Jointly

Head of

Household Single

Adjusted Gross Income Thresholds for Federal EITC

No Children

13,750

11,750

11,750

One Child

33,030

31,030

31,030

More than One Child

37,263

35,263

35,263

Maximum Credit - Federal EITC

No Children

399

399

399

One Child

2,662

2,662

2,662

More than One Child

4,400

4,400

4,400

Maximum Credit - State WFC

No Children

30

30

30

One Child

200

200

200

More than One Child

330

330

330

Note: Married tax filers filing separate returns are ineligible for the EITC

Source: IRS

The maximum federal benefit is $399 for filers with no children, $2,662 for filers with one quali-

fying child, and $4,400 for filers with more than one child. At 7.5 percent, the maximum for the

WFC would be $30, $200, and $330 respectively. The federal credit is indexed to inflation

which means the state WFC will be indexed as well.

Federal Benefit by Income for Single and

Head of Household Filers

0

1000

2000

3000

4000

5000

6000

7000

8000

0 5000 10000 15000 20000 25000 30000 35000 40000

No Ch ildren One Child More than One Child

Source: IRS

The WFC would not count as income for modified gross income in determining other benefits

(food stamps, for example). A federal EITC recipient can claim either the LICTR or the WFC

but not both. Generally, the EITC will be more beneficial to those filers near the income cut-offs

for the LICTR and less beneficial for those will incomes close to zero.

ADMINISTRATIVE IMPLICATIONS

TRD reports that the WFC forms and processing would impose moderate impacts on the depart-

ment if not included in an annual retrofit of the PIT forms.

NF/nt

House Bill 465 – Page

4