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 Sandoval

ORIGINAL DATE

LAST UPDATED

2/1/2007

HB 368

SHORT TITLE Armed Service Retiree Income Tax Exemption

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($2,520.0)

($10,330.0)

($8,700.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to SB493, SB43, SB492, HB541, HB207, HB497

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

Veterans Service Commission (VSC)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

House Bill 368 exempts up to $50 thousand of earned income of military retirees from the

personal income tax.

FISCAL IMPLICATIONS

The fiscal impact of House Bill 368 is an $8.4 million reduction in personal income tax revenues

per year. It is assumed that the impact for FY07 occurs in the second quarter of 2007 and

therefore only accounts for 30 percent of the tax year reduction or $2.5 million. The FY08

impact is $10.2 million, 70 percent of the tax year 2007 impact and 50 percent of the tax year

2008 impact. In FY09, the impact is $8.7 million.

House Bill 368 – Page

2

According to Taxation and Revenue Department,

The Department does not have detailed information about the earned income of military

retirees in the state. To estimate the earned income of these individuals, we consulted federal

tax returns filed by all New Mexico residents who reported some form of pension income.

39% of single taxpayers and 63% of married taxpayers with pension income reported some

form of earned income during 2003. Applying these percentages to the population of 21,000

military retirees yields an estimate of 11,900 with earned income. We then assumed that the

average earned income of military retirees is the same as the average of all taxpayers

reporting pension income. In 2003 this average was $26,000 for single taxpayers. We used

the same value for married taxpayers because we are only interested in the earned income of

the military retiree not that of the retiree’s spouse. Applying inflation to the income figures,

total earned income of military retirees would be approximately $350 million. After

applying the 50%/$50,000 limit, this amount is reduced to $166 million. The average

effective tax rate on this exclusion would be 5%, yielding annual impacts of $8.4 million in

tax year 2007.

SIGNIFICANT ISSUES

Exempting earned income gives military retirees an incentive to either remain or relocate in New

Mexico and augment the work force. The military trains career service men and women in a

variety of occupations that are in high demand in the state, particularly high tech and health care.

Many retirees, however, are highly skilled and there is little evidence that military retirees are

more likely to work in needed fields than other types of retirees, such as federal and state

retirees. Further, military veterans that did not retire from the service have many of the same

skills as retirees but do not receive an exemption under this proposal. Allowing one class of

retiree an exemption from personal income tax creates a perception of inequity and narrows the

base of the income tax and puts more pressure on the tax system to generate the same revenue.

Veterans Services Commission:

Young military retirees bring the following to the state:

a.

Service acquired skills that are immediately transferable to civilian requirements

b.

Entrepreneurial spirit

c.

Health and Dental care for themselves and their dependents

d.

High tech qualifications in demand in our high tech industries

e.

Desperately needed qualified health care skills

TRD:

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 $700 per claimant mentioned above

.

House Bill 368 – Page

3

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Below is an enumeration of the bills introduced so far in the 2007 session:

207 H Cote ARMED FORCES INCOME TAX EXEMPTION

368 H Sandoval ARMED SERVICE RETIREE INCOME TAX EXEMPTION

497 H Foley MILITARY RETIREMENT PAY TAX EXEMPTION

541 H Anderson ARMED FORCES INCOME TAX EXEMPTION

43 S Robinson MILITARY PENSION INCOME TAX EXEMPTION

492 S Carraro ARMED SERVICES INCOME TAX EXEMPTION

493 S Carraro MILITARY PENSION INCOME TAX EXEMPTION

ADMINISTRATIVE IMPACTS

TRD reports that the administrative impact would be relatively minor and would not require

additional resources.

ALTERNATIVES

One alternative is to indicate particular occupations, such as education or health care, to

encourage development in needed occupations.

ADDITIONAL ISSUES

TRD has provided a synopsis of legislation affecting military service men and women:

Present law treatment of military retirement income

Federal tax treatment of military retirement benefits:

Military pension income is treated as taxable income for federal income tax purposes. An

exclusion is provided for survivor annuity payments. Veteran’s benefits are excluded from

income tax.

New Mexico Statutes:

New Mexico statutes follow federal law in the treatment of military retirement income.

Persons over 65 years of age are allowed an exemption from taxable income of $8,000 per

person. This exemption is reduced for taxpayers with adjusted gross income of more than

$15,000 ($30,000 married) so that no exemption is available if adjusted gross income is more

than $25,500 ($51,000 married).

Other states’ tax treatment of military retirement income:

1

Most states with a personal income tax allow some form of exclusion for retirement income,

defined as government pension payments, Social Security, Railroad Retirement, private

pension plans and public or private deferred compensation plans. Two purposes are cited for

these provisions: to protect the income of retired persons and to encourage retired persons to

re-locate or to remain in the state.

The U.S. Supreme Court has ruled that states may not discriminate against federal civil

service or military pensions by providing better treatment of state pensions than is provided

1

Description and table are from National Conference of State Legislatures publication “State Personal Income

Taxes on Pensions and Retirement Income: Tax Year 2005," published in January 2006.

House Bill 368 – Page

4

for federal pensions. However, there is no federal impediment to a state providing better

treatment for public pensions than is provided for private pensions.

The following table summarizes the treatment of military pensions by the 42 states that have a

broad-based personal income tax. Of the 42 states, all but 7 provide some form of exclusion

for military pensions. In most cases, this relief is also provided for federal civilian pensions,

state and local government pensions and for Social Security income. Only 2 states

(Connecticut and New Jersey) provide relief that is targeted uniquely at military pensions.

Description:

Number of

States with

Provision:

Notes:

Full exclusion

12

AB, HI, IL, KS, LA, MA, MI, MS, NJ,

NY, PA, WI

Capped dollar amount

7

AZ, AR, KY, ME, NC, ND, WV

Capped amount and age

threshold

10

CO, DE, DC, GA, ID, IN, IA, MD, SC,

VA

Percentage of military

pension

1

CT

Amount subject to income

level

3

MO, MT, OK

No specific exclusion<1>

7

MN, CA, NE, NM, RI, UT, VT

Tax credits

2

OH, OR

Total

42

NF/csd