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

SPONSOR Park

ORIGINAL DATE

LAST UPDATED

2/16/07

HB 504

SHORT TITLE Higher Ed Expenses Income Tax Credit

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

($37,000.0)

Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Higher Education Department (HED)

SUMMARY

Synopsis of Bill

House Bill 504 provides a credit of $500 against personal income tax liability for taxpayers who

paid tuition or fees to a public post-secondary educational institution or private accredited

college. The credit is not refundable meaning it cannot exceed the taxpayer’s liability.

FISCAL IMPLICATIONS

TRD calculates the fiscal impact as though it only went to full time students:

The $37 million recurring impact shown above assumes $125 of the maximum $500

credits are taken for tuition credits for 50,400 students, while the full $500 credits are

taken for tuition payments for 61,600 students. According to a document

1

published by

the New Mexico Higher Education Department, approximately 112,000 or 88 percent of

New Mexico’s approximately 128,000 attendees of New Mexico post-secondary

1

Please see: “The Condition of Higher Education in New Mexico –2005-2006" on the Public Education

Department website, pages 18 and 69.

House Bill 504 – Page

2

institutions are New Mexico residents. Wording of the proposed legislation would allow

the credits to be taken by “individuals" hence a family with two children in college would

be able to take $1,000 in credits. Of the approximate 896,000 New Mexico personal

income tax returns, approximately 593,000 report taxable income greater than 0. The

estimate above assumes this is the group that would take the credits. Within the group,

approximately 45 percent, or 50,400 report tax obligations between 0 and $500, and thus

would be able to claim an average of approximately $125 in credits. 55 percent would be

able to claim $500 in credits.

SIGNIFICANT ISSUES

The credit has a very wide scope. As written, it could be used by someone who took one class at

a community college. According to a recent Santa Fe Community College catalog, a class on the

pastel landscape at ghost ranch has a fee of $69. Since the credit is set at $500 and goes to

taxpayers who paid tuition or fees on behalf of themselves or a dependent, a taxpayer signing up

for this class would earn $431 by signing up for the class. TRD notes that fees at a golf course

could also plausibly make a taxpayer eligible for the credit.

HED:

Currently, families have two federal education tax benefits available to them, the Hope

Scholarship and the Lifetime Learning Credit.

Hope Scholarship

The Hope Scholarship provides a $1,650 tax credit per student per year for higher

education expenses during the first two years of postsecondary education. The amount

increased in 2006. Previously it was up to $1,500. The amount of the Hope Scholarship is

increased to $3,300 for Gulf Opportunity Zone Students. The amount of the credit is

100% of the first $1,100 of qualified tuition and related expenses per student and 50% of

the second $1,100 of qualified tuition and related expenses. The taxpayer must list the

student as an exemption on their income tax return and the expenses must have been paid

by the taxpayer or by the student. Scholarships and financial aid do not count as qualified

tuition and related expenses paid by the taxpayer.

Lifetime Learning Tax Credit

The Lifetime Learning Tax Credit provides a tax credit of up to $2,000 per taxpayer for

education expenses. The amount of the credit is equal to 20% of the first $5,000 of

qualified tuition and related expenses paid by the taxpayer. Starting in 2003, the $5,000

limit was increased to $10,000. Thus the credit is up to $1,000 through the year 2002 and

$2,000 thereafter. In 2006 the maximum lifetime learning tax credit increased to $4,000

and 40% for gulf opportunity zone students.

Qualified tuition and related expenses include expenses for any course of instruction at an

eligible educational institution to acquire or improve job skills. This means that the credit

may be used for part-time study, not just students enrolled at least half-time in a degree

program. Unlike the Hope Scholarship, the Lifetime Learning tax credit may be claimed

for an unlimited number of years.

House Bill 504 – Page

3

ALTERNATIVES

To limit the scope of the credit, language referring to students enrolled full time in a degree

program should be added. Also, the credit could be limited by allowing the credit only for

eligible expenditures up to $500.

NF/nt