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

SPONSOR Ortiz y Pino

ORIGINAL DATE

LAST UPDATED

1/24/06

HB

SHORT TITLE Include Certain Amounts as Taxable Income

SB 223

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

31,000.0

62,000.0

61,000.0 Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Voices for Children New Mexico (VCNM)

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate Bill 223 amends the definition of “net income” in the Income Tax Act to subtract the

amount of state and local taxes from the taxpayers itemized deductions. The result is that state

and local taxes will be added back into net income for the purposes of determining tax liability.

FISCAL IMPLICATIONS

The fiscal impact was derived by applying the income appropriate effective NM personal income

tax (PIT) rate to the number of NM tax filers who included state and local taxes in their itemized

deductions. Using IRS date from 2003, it is estimated that there were 202,000 returns that de-

ducted state and local taxes from their income, summing to $1.2 billion. Under current law, that

income is not subject to NM PIT. SB 223 will increase revenue by $62.0 million per tax year.

As Table 1, shows the tax rate for the income is set to the top rate since this would be the rate on

any marginal income for these tax filers. The tax filers who had less than $30,000 in income

have a lower marginal rate. FY08 impact is slightly less at $61.0 million due to lower rates in tax

year 2008.

Senate Bill 223 – Page 2

Table 1: Tax Returns with the State and Local Taxes Itemized

<30k 30-50k 50-75k 75-100k 100-200k 200k+ Total

Returns with Deduction 28,905

44,475

49,295

34,483

36,319

8,562

202,040

Amount of Deduction

42,513

93,542

175,539

191,359

363,350

330,187

1,196,489

NM PIT Effec tive Rate

2.9%

5.2%

5.2%

5.3%

5.3%

5.3%

5.2%

1,233

4,864

9,128

10,046

19,258

17,500

62,029

Source: IRS, TRD

SIGNIFICANT ISSUES

New Mexico is one of only six states that do not add back in the state and local deductions into

the taxable income.

ADMINISTRATIVE IMPLICATIONS

TRD reports that implementing provisions of the measure would impose moderate administrative

impacts on the Department. A new line on would need to be added to the PIT-1 form. Changes to

all other forms, which reference the taxable income line and tax lines would need to be made;

instruction and publication changes would also be needed. Taxpayer and staff education would

be required. Changes would also be needed on the withholding tax tables.

NF/nt