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).

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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 Lujan, B.

ORIGINAL DATE

LAST UPDATED

2/3/07

3/22/07 HB

436/aHTRC/aSCORC/

aSFC

SHORT TITLE Working Families Tax Credit

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($2,950)

($50,414)

($49,550) Recurring General Fund

(1,400)

Nonrecurring General Fund

380

493 Recurring

Local

Government

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to SB482, SB317, HB833, HB973

SOURCES OF INFORMATION

LFC Files

Taxation and Revenue Department (TRD)

Responses Received From

Taxation and Revenue Department (TRD)

Department of Finance and Administration (DFA)

Human Services Department (HSD)

SUMMARY

Synopsis of SFC Amendment

The Senate Finance Committee proposes to amend House Bill 436 to add the following

provisions:

Disabled Street Vendor Gross Receipts: (duplicates a section of Senate Bill 317) This

provision creates a gross receipts tax exemption for the receipts from sale of goods by a disabled

street vendor. For the purposes of the provision, a person qualifies as disabled if they are blind,

permanently disabled with medical improvement not expected pursuant to 42 USCA 421 for the

purposes of the federal Social Security Act, or permanently and totally disabled pursuant to the

state Workers’ Compensation Act.

House Bill 436/aHTRC/aSCORC – Page

2

A street vendor is defined as a person licensed by a local government to sell tangible personal

property by newly setting up a sales site daily or selling from a movable cart, blanket, or other

device.

The effective date of these provisions will be July 1, 2007.

Low-income Housing Material Gross Receipts. (duplicates House Bill 833) An expansion of a

gross receipts and governmental gross receipts deduction granted in Section 7-9-60 NMSA 1978

to allow receipts from selling construction material or metalliferous mineral ore to a 501(c) (3)

organization organized to provide homeownership opportunities to low-income families to be

deducted.

The effective date of these provisions is July 1, 2007.

Armed Services Income Tax Exemption: (duplicates a section of Senate Bill 317) The Senate

Floor amendment 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.

Middle Income Taxpayer Exemptions. (similar to House Bill 1254) An expansion of the

income thresholds for the exemption for middle-income taxpayers.

Begin

Phase-out Max Income

Begin Phase-

out Max Income

Current Law

24,000

$

40,667

$

16,000

$

27,110

$

HB436 as Amended

30,000

$

55,000

$

20,000

$

36,667

$

Married/Head of

Single

The exemption, $2,500 per claimed exemption, remains the same and phases-out at a rate of 20

percent for each additional dollar for married filing separately, 15 percent for singles and 10

percent for married filing jointly and head of household filers.

The exemption would be effective for tax years 2007 and beyond.

Special Needs Adoption Tax Credit/Repeal Exemption. (Similar to House Bill 973) The

proposed amendment enacts a new credit against personal income tax liability for taxpayers who

adopt a special needs child up to $1,000. The credit is refundable meaning if the credit exceeds

liability then the excess is refunded to the taxpayer. The credit can be claimed for each year that

the taxpayer claims the special needs child as a dependent on their federal income tax return.

The exemption that exists under current law is repealed for these costs.

A special needs adopted child is an individual (who may be over 18 years old) who is certified

by the Children Youth and Families Department (CYFD) as meeting the definition of “difficult

to place," with the caveat that if the classification is based on a physical or mental impairment or

an emotional disturbance that impairment or disturbance shall be at least moderately disabling.

The effective date is January 1, 2007.

Modifying Tax Penalties and Interest. (similar to House Bill 1251) amends provisions relating

to penalties and interest for incorrect and late tax payments.

House Bill 436/aHTRC/aSCORC – Page

3

•

repeals the “double local option" penalty imposed for misreporting the food and medical

services deductions and creates a tax credit for taxpayers who paid that penalty between

January 1, 2005 and July 1, 2007. The amount of the credit equal to the entire amount of

penalty paid. The credit must be claimed by July 1, 2010 and may be claimed against

gross receipts tax, compensating tax, or withholding tax. (effective July 1, 2007)

•

increases from $10 to $25 the minimum amount that a taxpayer must owe for TRD to

assess.

•

amend language to replace the current 15 percent interest charged when a taxpayer

underpays or overpays taxes with a rate established for individuals pursuant to Section

6621 of the Internal Revenue Code. That section of federal code sets the rate of interest

on underpaid taxes at the federal funds rate plus 3 percent, and sets the rate on interest on

overpaid taxes as the federal funds rate plus 3 percent or 2 percent if the taxpayer is a

corporation.

•

allows TRD up to 120 days to process a claim for refund on severance taxes before

interest would be earned by a taxpayer. Currently, TRD is allowed up to 60 days to

process a refund claim before interest is earned by the taxpayer.

•

increases the maximum penalty that may be assessed when a taxpayer fails to pay a tax

due to negligence or disregard for TRD rules from 10 to 20 percent of the amount of tax

due. The penalty will still be imposed at a rate of 2 percent per month up to the

maximum.

•

expands the $50 penalty for failing to file an information return on time pursuant to the

gasoline tax act to include wholesalers, retailers and rack operators. Currently, that

penalty applies only to “taxpayers."

The effective date of these provisions will be January 1, 2008 except as noted above.

Synopsis of SCORC Amendment

The Senate Corporations and Transportation Committee amended House Bill 436 clarifying that

only NM residents can claim the credit. The amendment also deletes a section referring to

married filing separate filers which was unnecessary as the federal earned income credit excludes

this filing category.

Synopsis of HTRC Amendment

The House Taxation and Revenue Committee amended House Bill 436 to make the credit

available even if a taxpayer has claimed a low-income comprehensive tax rebate. HTRC also

amended the percentage of the federal earned income credit to 8 percent, down from the original

10 percent.

Synopsis of Original Bill

House Bill 436 creates a new personal income tax credit called the “Working Families Tax

Credit" (WFTC) that is calculated as 10 percent of the federal Earned Income Credit (EIC). The

credit is refundable, meaning if the credit exceeds the taxpayer’s liability, the excess is refunded

to the taxpayer. HB 436 also amends the low-income comprehensive tax rebate (LICTR) to

make a taxpayer ineligible for LICTR if the taxpayer receives the WFTC. HB436 also explicitly

House Bill 436/aHTRC/aSCORC – Page

4

excludes credits provided in the Income Tax Act from the calculation of modified gross income.

The effective date is January 1, 2007.

FISCAL IMPLICATIONS

Recurring Revenue Impact

FY07 FY08 FY09

Working Families Credit

(29,100)

(30,000)

Recurring General Fund

*

*

Recurring General Fund

Recurring Local Government

(400)

(420)

Recurring General Fund

(267)

(280)

Recurring Local Government

Armed Forces Income Tax Exemption

(2,950)

(11,990)

(10,400)

Recurring General Fund

Middle Income Taxpayer Exemptions

(10,100)

(10,250)

Recurring General Fund

Special Needs Adoption Tax

Credit/Repeal Exemption

(540)

(540)

Recurring General Fund

1,716

2,055

Recurring General Fund

647

773

Recurrin

g

Local Government

TOTAL GENERAL FUND

(2,950)

(50,414)

(49,555)

Recurring General Fund

TOTAL LOCAL GOVERNMENT

0

380

493

Recurring Local Government

Disabled Street Vendor Sales Gross

Receipts

Low-income Housing Material Gross

Receipts

Modifying Tax Penalties and Interest

Working Families Tax Credit: Enacting this credit would reduce general fund personal income

tax revenue by $29.1 million per tax year based on $360 million in estimated federal EIC. Even

though the credit is for tax year 2007, it is assumed that it will be claimed in the filing season in

2008 and so all of the impact is in FY08. In 2004, 199,552 New Mexican taxpayers received the

federal EIC and 90 percent of the credits were in excess of liability.

Armed Services Income Tax Exemption: Exempting active duty salaries from personal income

tax would result in a $10 million reduction in personal income tax revenues going to the general

fund. Since the tax year straddles two fiscal years, the FY07 impact is $3 million, reflecting 30

percent of the tax year and the FY08 impact is $12 million, which include 70 percent of tax year

2007 and 50 percent of tax year 2008.

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

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.

Disabled Street Vendor Gross Receipts: LFC and TRD believe the fiscal impact of this

provision will be small due to the limited number of disabled street vendors operating in New

Mexico.

Low-Income Housing Materials Gross Receipts. Based on information from federal tax

returns filed by New Mexico non-profit entities TRD estimates that 20 to 30 non-profit entities

operate in New Mexico each year to provide low-income homeownership opportunities. Total

House Bill 436/aHTRC/aSCORC – Page

5

income of these entities is about $30 million per year TRD assumes that $10 million of that

income is spent on construction materials and would be eligible for the proposed deduction.

Taxed at a statewide rate of 6.6 percent, the proposal would reduce gross receipts tax collections

by about $660 thousand. About 60 percent of that revenue decrease would accrue to the general

fund and the remaining 40 percent would accrue to local governments.

Middle-income Tax Exemption. Fiscal impacts were estimated using information from state

income tax returns. Increased exemptions will be claimed on an estimated 208 thousand tax

returns filed by New Mexico residents, claiming $10.1 million in tax savings for an average

savings per return of $48. Total tax savings due to the provision should be stable from year to

year because the amount of the exemption and the income thresholds are not indexed for

inflation. This means that as taxpayers’ incomes grow over time they will become eligible for a

smaller exemption amount. This effect will offset the increase in the total population eligible for

the exemptions.

Special Needs Adoption Tax Credit

TRD reports that the repeal of the exemption will have an insignificant impact. On the credit,

TRD has provided this analysis:

In tax year 2004, exemptions allowed under present law totaling approximately $1.2

million were claimed on slightly over 300 New Mexico tax returns, and thus averaged

approximately $4,000 per return. Taxpayers claiming the returns were subject to a tax

rate of slightly over 5 percent. Hence the resulting "tax cost" to the State of New Mexico

General Fund totaled approximately $60,000 (i.e., $1,200,000 x .05). The average tax

benefit was approximately $125 per child or 5% of $2,500.

The recurring impact shown above assumes 350 households with 600 special needs

children would get credits totaling $600 thousand per year for an average benefit of

$1,700 per household. The $540,000 recurring fiscal impact above is the difference

between the estimated $60,000 impact of the current program and the estimated $600,000

annual impact of the proposed statute.

Modifying Tax Penalties and Interest. TRD reports that in FY05, interest collections from

taxpayers who underpaid were about $20 million, while interest payments to taxpayers who

overpaid were about $3 million. Thus, lowering interest rates on under and overpayments will

result in a general fund revenue reduction. TRD expects general fund interest payments to fall by

$2,108 thousand in FY09 and by about $8,292 thousand in FY12, when the impact of lower

interest rates is expected to level off. Local governments will also lose revenue due to the lower

interest rates.

TRD reports that in FY05, penalty collections were about $8 million, 95 percent of which was

due to payments at the maximum rate of 10 percent. Increasing the maximum rate to 20 percent

is expected to increase penalty revenue in about 75 percent of taxpayer cases because taxpayers

will have more incentive to pay on time. Additional general fund revenue due to higher penalties

is expected to be about $5,454 thousand in FY09. Local governments will also gain revenue due

to higher penalties.

TRD reports that total penalties for the food and medical services deductions are about $1.4

million since the penalties were first imposed in January 2005. The credit would give all of those

penalties. This revenue reduction to the general fund will be nonrecurring.

House Bill 436/aHTRC/aSCORC – Page

6

SIGNIFICANT ISSUES

Working Families Tax Credit. Twenty states, including the District of Columbia, currently

offer a state level EIC (Colorado’s EIC 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 individuals 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 EICs are refundable, according to research at the Institute

on Taxation and Economic Policy. New York and Vermont have the most generous EICs

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.

TABLE 1: STATE EARNED INCOME TAX CREDITS BASED ON THE FEDERAL EITC

State

Percentage of Federal

Credit

(Tax Year 2006

Except as Noted)

Refundable

Workers Without

Qualifying Children

Eligible.

Delaware

20%

No

Yes

District of Columbia

35%

Yes

Yes

Indiana

a

6%

Yes

Yes

Illinois

5%

Yes

Yes

Iowa

6.5%

No

Yes

Kansas

15%

Yes

Yes

Maine

5%

No

Yes

Maryland

b

20%

Yes

No

Massachusetts

15%

Yes

Yes

Michigan

10% (effective in 2008; to

20% in 2009)

Yes

Yes

Minnesota

c

Average 33%

Yes

Yes

Nebraska

8%

Yes

Yes

New Jersey

d

20%

Yes

No

New York

e, f

30%

Yes

Yes

Oklahoma

5%

Yes

Yes

Oregon

5% (to 6% in 2008)

Yes

Yes

Rhode Island

25%

Partially

g

Yes

Vermont

32%

Yes

Yes

Virginia

20%

No

Yes

Wisconsin

4% - one child

4% - one child

No

14% - two children

14% - two children

43% - three children

43% - three children

House Bill 436/aHTRC/aSCORC – Page

7

TABLE 1: STATE EARNED INCOME TAX CREDITS BASED ON THE FEDERAL EITC

State

Percentage of Federal

Credit

(Tax Year 2006

Except as Noted)

Refundable

Workers Without

Qualifying Children

Eligible.

Notes: From 1999 to 2001, Colorado offered a 10% refundable EITC financed from required rebates under the state’s “TABOR" amendment.

Those rebates, and hence the EITC, were suspended beginning in 2002 due to lack of funds and again in 2005 as a result of a vot er-

approved five-year suspension of TABOR. Under current law, the EITC is projected to resume in 2010.

a Presently scheduled to expire in TY 2011.

b Maryland also offers a non-refundable EITC set at 50 percent of the federal credit. Taxpayers in effect may claim either the refundable

credit or the non-refundable credit, but not both.

c Minnesota’s credit for families with children, unlike the other credits shown in this table, is not expressly structured as a percentage of the

federal credit. Depending on income level, the credit for families with children may range from 25 percent to 45 percent of the federal credit;

taxpayers without children may receive a 25 percent credit.

d The New Jersey credit is available only to families with incomes below $20,000.

e The New York credit would be reduced automatically to the 1999 level of 20 percent should the federal government reduce New York’s

share of the TANF block grant.

f Beginning in 2006, New York also allows certain non-custodial parents who are making child support payments to claim an EITC that is the

greater of 20 percent of the federal EITC that they would be eligible for with one qualifying child as a custodial parent or 250 percent of the

federal EITC for taxpayers without qualifying children.

g Rhode Island made a very small portion of its EITC refundable effective in TY 2003. In 2006, the refundable portion was increased from 10

percent to 15 percent of the nonrefundable credit (i.e. 3.75 percent of the federal EITC).

Source: Economic Policy Institute (

www.epi.org

)

For a single or married taxpayer with no children, the cut-off for benefits is very low but for

taxpayers with children, the benefit goes to many more. The federal EIC can only be claimed if

someone is below the income cut-offs and

•

has a valid social security number

•

is not filing separately

•

is a US citizen or resident alien

•

does not have foreign income

•

does not have more than $2,800 in investment income

•

has some earned income.

Table one shows the cut-off and peak amounts and the maximum credit for each class of filer.

For example, a married filer with one child and adjusted gross income of between $8,000 and

$16,500 would receive the maximum federal credit of $2,747 (state credit = $275). The same

filer with income over $34,001 in adjusted gross income would receive no federal credit and,

thus, no state credit.

House Bill 436/aHTRC/aSCORC – Page

8

Table 1: Federal Income Cut-offs for Earned Income Credit

Maximum

Credit

Cut-off

Start Finish

Single

No children

12,120

5,500

6,500

412

One child

32,001

8,500

14,500

2747

More than one child

36,348

11,500

14,500

4536

Married

No children

14,120

5,500

8,500

412

One child

34,001

8,000

16,500

2747

More than one child

38,348

11,500

16,500

4536

Source: IRS 2006 Tax Year

Peak

Adjusted

Gross Income

For filers without children, they must be age 25 to 65, not a qualifying child or dependent of

another person and must have lived in the United States for more than six months. For filers

with children, the children must be younger than 19, younger than 25 if a full time student, or

permanently disabled. The children also have to have lived with the filer for more than six

months and cannot be claimed as a qualifying child or dependent of another person.

Figure Two: Working Families Tax Credit Phase-out

0

50

100

150

200

250

300

350

Source: TRD

One of the features of the EIC is that it phases-out at higher incomes. Figure two, which is based

on 2005 data, shows the maximum average credit of about $325, which would be $3,250 for the

federal EIC, is reached at an income level of $13,000. This is an average of all tax filers, whether

single or not or childless or not.

Disabled Street Vendor Gross Receipts: The Division of Vocational Rehabilitation notes that

since vendors are able to pass gross receipts tax on to their customers the provision does not

provide tax relief to disabled vendors. However, it will relieve disabled street vendors of the

responsibility to collect and pay the gross receipts tax.

House Bill 436/aHTRC/aSCORC – Page

9

Special Needs Adoption Credit. From Special-needs.adoption.com:

Over 100,000 children are waiting to be adopted right now out of the more than half

million US children in foster care. The rest will eventually be reunited with birth families

or will "age out" of the system while waiting to be reunited. Of the waiting children with

special needs who are younger than school age, many are of minority race, and all of

them are members of sibling groups, or have mild to severe disabilities, or are at risk of

developing disabilities later due to risk factors. Some children have correctable problems.

Others will "outgrow" their challenges. A few are remarkably resilient and will not

develop expected problems. However, adoptive parents must be ready to face and deal

with all types of outcomes, from the bleak to the near-miraculous.

[Cost of adoption]

The cost varies from place to place but the good news is that with careful planning,

special needs adoption can be a low-cost or no-cost process. Most expenses involved in

most of the authors' domestic special needs adoptions were reimbursed to them.

State or public adoption agencies do not usually charge for any special needs adoption

service. Fees at private adoption agencies for adoption services vary widely from no

charge at all to several thousand dollars, or more.

When a domestic special needs adoption takes place in a state offering "Purchase of

Services", the state with custody of the child may pay some or all of the private adoption

expenses for the adoptive parent or parents. This is how a private agency can afford to

operate without charging the family a home study or placement fee. Adoptive parents

should be sure and ask a private agency about "Purchase of Service adoptions."

In the U.S., up to $2,000 of a family's one-time special needs adoption expenses are

refundable for children who meet the requirements under the federal law. States may

allow up to $2,000 per child, or less, but not more. The expenses are reimbursed after the

adoption has been completed. Adoptive parents should keep receipts for all expenses

from the home study to the cost of photo listing book subscriptions. They should be sure

their agency participates in this refund program, and then be sure and request the

necessary forms after placement has occurred but before the adoption is legally finalized.

State and federal programs are also available to help parents with the cost of raising

adopted children with special needs.

Middle-income Taxpayer Exemption. The beneficiaries of the expansion of the thresholds are

those taxpayers who are above the current thresholds. For example, a head of household with

one child and $30,000 in adjusted gross income would deduct $5,000 from adjusted gross

income rather than $3,800 resulting in about $60 tax savings. As TRD points out below, the

phase out fixes a cliff that was in current law: under the formula for a married filing jointly

taxpayer, if the taxpayer has income of $41,000, they should receive an $800 exemption but the

law limits the exemption to those with $40,667 in income and so this taxpayer would not receive

a deduction. The figure below demonstrates the cliff for married filing jointly and heads of

household.

House Bill 436/aHTRC/aSCORC – Page

10

0

500

1000

1500

2000

2500

3000

Adjusted Gross Income

HB436a

Curre nt Law

Modifying Tax Penalties and Interest. Taxpayers have protested to TRD that the 15 percent

interest imposed on underpayments is too high compared with current market rates. Currently,

the federal funds rate is about 5 percent. The federal government responded to this problem by

enacting Section 6621 of the Internal Revenue Code. That section allows interest on tax

underpayments to fluctuate as market interest rates fluctuate.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

SB317 is a related bill.

Similar to HB436, SB 482 creates a State Earned Income Tax Credit of 10 percent of the federal

EIC and SB482 also allows both the created credit and LICTR.

ADMINISTRATIVE ISSUES

Modifying Tax Penalties and Interest. TRD reports that changing the interest rate on

underpayments and overpayments of tax from a fixed 15 percent to a rate that moves with the

federal funds rate will require systems changes. TRD will change instructions and forms. If the

interest and penalty are changed effective July 1, 2008, then instructions for filing personal

income tax, corporate income tax, fiduciary tax and property tax returns will be incorrect for the

last half of 2008. Incorrect instructions will affect late filers and extension filers.

TECHNICAL ISSUES

Armed Services Income Tax Exemption: 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 attendance while in the active service at a school

designated as a Military Service school by law or by the Secretary concerned." SB492 refers to

“active service" which is presumed to mean “active duty" though clarification may be a

necessary correction.

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.

House Bill 436/aHTRC/aSCORC – Page

11

Disabled Street Vendor Gross Receipts: DVR believes the definition of “disabled" provided in

the provision will exclude individuals earning “substantial gainful activity," as defined by the

Social Security Act, which is equivalent to $900 per month for persons with disabilities and

$1,500 per month for those who are blind, from receiving the proposed gross receipts tax

exemption. DVR recommends amending the bill so the definition of disability matches that cited

in Section 504 of the federal Rehabilitation Act.

OTHER ISSUES

Armed Services Income Tax Exemption: 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/mt