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

SPONSOR Foley

ORIGINAL DATE

LAST UPDATED

2/3/07

HB 497

SHORT TITLE

Military Retirement Pay Tax Exemption

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($5,910.0)

($23,640.0)

($19,700.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to HB207, HB368, H541, S43, S492, S493

SOURCES OF INFORMATION

LFC Files

Military.com

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

House bill 497 exempts military retirement pay from the personal income tax for any resident of

NM who served in the US armed forces or the surviving spouse who is a resident of a person

who served in the US armed forces.

The effective date is January 1, 2007.

FISCAL IMPLICATIONS

The annual impact for exempting the retirement income of retired members of the armed forces

is expected to reduce personal income tax revenues by $19.7 million. Due to the timing of the

effective date, 30 percent of the reduction in tax year 2007 accrues to FY07, or $5.9 million. The

other 70 percent plus 50 percent of tax year 2008 accrues to FY08 which totals $23.6 million. In

future years, the tax year impact is distributed evenly between the fiscal years.

House Bill 497 – Page

2

The fiscal impact is based on 22,000 retired armed forces in New Mexico with a total of $460

million in pension income. The assumed effective income tax rate is 4.3 percent based on TRD

analysis. The analysis includes both residents and non-residents because of legal issues raised by

TRD.

SIGNIFICANT ISSUES

TRD points out that excluding nonresidents treats them differently for similar income and

therefore may raise constitutional issues.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

The following table shows all of the bills currently under consideration:

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

OTHER SUBSTANTIVE ISSUES

TRD:

The measure would encourage military retirees to move to New Mexico. It is possible that

this group of individuals possesses substantial work skills that would benefit New Mexico

economic development efforts. It is sometimes argued that this group places relatively

modest demands on infrastructure (education, law enforcement, etc.) than other segments of

the population.

Individuals with incomes and other circumstances similar to people receiving the proposed

exemption are likely to view it as unfair, especially when they compete with the retirees for

jobs, and when the retirees are individuals with relatively high incomes. According to

information on the “military.com" website (http://usmilitary.about.com/), military retirement

pay can be over $9,000 monthly for high-ranking officers retiring in 2004.

The fiscal impact shown above does not reflect estimates of the potential “feedback" effects

of the proposals on the size of the New Mexico economy. Such effects might arise, for

example, if tax reductions increase investment or attract new workers to the state. At present,

the department does not have reliable means of estimating the magnitude of these effects and

their potential impact on state revenues.

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 $880 per claimant mentioned above. The $600 in

state tax savings would, for example, be reduced to $704 ($880 x .8) for a taxpayer in the

20% federal tax bracket.

House Bill 497 – Page

3

ADDITIONAL INFORMATION FROM TRD:

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. Veterans’ 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:

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

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 seven 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 two

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/nt