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

SPONSOR Anderson

ORIGINAL DATE

LAST UPDATED

2/6/07

HB 541

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

($3,000.0)

($12,000.0)

($10,000.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

Related Bills:

HB 207 Cote ARMED FORCES INCOME TAX EXEMPTION

HB 368 Sandoval ARMED SERVICE RETIREE INCOME TAX EXEMPTION

HB 497 Foley MILITARY RETIREMENT PAY TAX EXEMPTION

SB 43 Robinson MILITARY PENSION INCOME TAX EXEMPTION

SB 492

Carraro ARMED SERVICES INCOME TAX EXEMPTION

SB 493

Carraro MILITARY PENSION INCOME TAX EXEMPTION

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 541 exempts income earned as active duty members of the US armed forces. The

effective date is January 1, 2007.

House Bill 541 – Page

2

FISCAL IMPLICATIONS

TRD:

The $10 million annual fiscal impact is based on the following assumptions: 1) the average

salary of military service people is approximately $45,000, 2) approximately 70% or $31,500

would be taxable after allowance for present law exemptions and deductions, 3) the tax

reduction to service members would be approximately $1,350 annually, and 4).

approximately 7,000 New Mexico taxpayers or roughly .5% of the 1.4 million total U.S.

active service members receive the exemption. The estimate also assumes obligations of

approximately 3,000 national guard and army reserve members receiving income from

weekend meetings and summer camp would generate approximately $400,000 in reduced tax

obligations.

Due to the timing of the exemption, it’s assumed that 30 percent of the 2007 impact will fall in

FY07 and 70 percent in FY08. For tax years 2008 and beyond, it is assumed that half of the

impact will fall in each fiscal year.

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."

NM Department of Military Affairs reports that this bill does not cover members of the full-time

National Guardsmen.

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

20% federal tax bracket.

NF/nt