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

SPONSOR Cote

ORIGINAL DATE

LAST UPDATED

1/28/07

3/6/07 HB 207

SHORT TITLE

Armed Forces Income Tax Exemption

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($2,950.0)

($11,990.0) ($10,400.0)

Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to HB368, SB43, SB492, SB493, HB497

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

Taxation and Revenue Department (TRD)

Department of Military Affairs (DMA)

SUMMARY

Synopsis of Bill

House Bill 207 exempts income earned from active duty service from the state personal income

tax. The effective date is January 1, 2007 so would apply for tax year 2007.

FISCAL IMPLICATIONS

Exempting active duty salaries from personal income tax would result in an annual $10 million

reduction in personal income tax revenues going to the general fund. Since tax year 2007 is

partially over, it is assumed that 30 percent of tax year 2007 impact is in FY07 and 70 percent is

in FY08, inflating FY08 above $10 million. FY08 also contains half of tax year 2008’s impact.

According to TRD, the fiscal impact is based on approximately 7,000 active duty military in

New Mexico earning an average $45,000 per year as well as an additional 3,000 active duty

House Bill 207 – Page

2

National Guard and army reserve members. The average tax relief to service members would be

$1,350 and $133 for National Guard and army reserve members.

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

There are several bills that have been introduced to exempt active duty military pay, military

retirement income, and earned income of military retirees. SB492 exempts all income for active

duty military. HB 368 exempts earned income by military retirees up to $50 thousand. SB 43, SB

493 and HB 497 exempt military pension income.

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

liability 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 savings would, for example, be reduced to $1,260 ($1,575 x .8) for a taxpayer in the

20% federal tax bracket.

NF/nt