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

SPONSOR Garcia,MH

ORIGINAL DATE

LAST UPDATED

2/2/06

HB 739

SHORT TITLE School Facility Construction Gross Receipts

SB

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(13,162.5)

Recurring General Fund

(8,775.0)

Recurring Local Govern-

ments

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Public School Facilities Authority (PSFA)

SUMMARY

Synopsis of Bill

House Bill 739 creates a new gross receipts tax deduction for receipts from providing construc-

tion services to a school district or the public school facilities authority to construct a public

school facility.

The effective date of these provisions is July 1, 2006.

FISCAL IMPLICATIONS

Based on information provided by the Public School Capital Outlay Council, TRD estimates that

total state spending on public school construction averages about $122 million per year. This

amount is matched by local spending, bringing total public school construction spending to an

average of $250 million per year. In addition to this $250 million from the state and local match-

ing, local districts also pay about $125 million more per year for projects separate from the Pub-

lic School Capital Outlay Council for a grand total of $375 million per year.

House Bill 739 – Page

2

PFSA estimates that about 10 percent of this $375 million will be spent on design and other ser-

vices not eligible for the deduction. Assuming a statewide effective tax rate of 6.5 percent on the

remaining $337.5 million, this deduction will reduce gross receipts tax revenue by about $21.9

million. About 60 percent of this revenue loss will accrue to the general fund, while about 40

percent will accrue to local governments.

ADMINISTRATIVE IMPLICATIONS

The administrative impact on TRD will be minimal.

TECHNICAL ISSUES

TRD and PSFA note that the sale of construction services to government entities at the federal,

state and local level are all generally subject to the gross receipts tax. House Bill 739 would pro-

vide a deduction for certain spending by local and state governments, and thus could lead to a

federal challenge that New Mexico’s taxation of construction is discriminatory. Given the large

presence of federal facilities in the state, this could pose a serious threat to the state gross receipts

tax base.

OTHER SUBSTANTIVE ISSUES

Because public school operations are paid for from the state general fund, this bill will reduce the

cost of construction but result in less general fund revenue available for operations.

Construction currently represents roughly 13 percent of the state’s gross receipts tax base, or

about $330 million of state and local revenue per year.

SS/mt