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F I S C A L I M P A C T R E P O R T
SPONSOR Silva
ORIGINAL DATE
LAST UPDATED
2/18/07
2/26/07 HB 666/aHENRC/aHFL#1
SHORT TITLE Electric Power Plant Property Valuation
SB
ANALYST Francis
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY07
FY08
FY09
* See Narrative
(Parenthesis ( ) Indicate Revenue Decreases)
Similar SB874
Relates to HB665, SB340
ESTIMATED ADDITIONAL OPERATING BUDGET IMPACT (dollars in thousands)
FY07
FY08
FY09 3 Year
Total Cost
Recurring
or Non-Rec
Fund
Affected
Total
$65.0
$65.0
$130.0 Recurring
TRD
(Parenthesis ( ) Indicate Expenditure Decreases)
SOURCES OF INFORMATION
LFC Files
Taxation and Revenue Department
Response Received from:
Taxation and Revenue Department (TRD)
SUMMARY
Synopsis of House Floor Amendment #1
An amendment on the House Floor removes the requirement that the Taxation and Revenue
Department (TRD) specify the information required to support a claim of obsolescence and the
requirement for TRD to give sufficient time for a taxpayer to establish a claim before TRD issues
its valuation. TRD still must provide reasons for its denial of a claim of obsolescence.
pg_0002
House Bill 666/aHENRC/aHFL#1 – Page
2
Synopsis of HENRC Amendment
The House Energy and Natural Resources Committee amended House Bill 666 in the following
ways:
•
Changed the title to more accurately reflect the content of the bill
•
Inserted an emergency clause to make the legislation effective upon signing
•
Deletes a section on allowing alternative valuation methods that was proposed in the
original
•
Adds a new section that allows alternative valuation methods if the Taxation and
Revenue Department disputes a claim for functional or economic obsolescence.
Synopsis of Original Bill
House Bill 666 modifies the valuation methodology for property used in the generation,
distribution or transmission of electricity. The valuation can include deductions for “functional"
and “economic" obsolescence.
.
Economic obsolescence is defined as the loss of value caused by unfavorable economic
influences or factors outside of the property not including physical depreciation.
.
Functional obsolescence is loss due to functional inadequacies or deficiencies caused by
factors within the property not including physical depreciation.
The taxpayer choosing to include economic and/or functional obsolescence must submit a claim
documenting the obsolescence. Such documentation may include industry comparisons, volume
reductions, and other objective evidence of obsolescence. The Taxation and Revenue
Department (TRD) will determine if the evidence is sufficient and notify the taxpayer if a claim
is rejected with the reasons and what additional information is needed to establish obsolescence,
giving a taxpayer enough time to comply.
This section removed by HENRC amendment:
A taxpayer is given a choice of valuation methods:
1.
capitalization of income
2.
market value of stock
3.
cost less allowance for obsolescence and depreciation.
Whichever method chosen the taxpayer must use that method for subsequent years unless, after
three years, the taxpayer can show sufficient cause to change methods.
This act is applicable to property tax years 2007 forward.
HENRC amendment declares an emergency.
FISCAL IMPLICATIONS
The amendment allows the choice of valuation for cases where TRD disputes the claims of
functional or economic obsolescence. While there is no precise way to determine the impact of
this modification to the valuation methodology, since there is a choice of methods in cases where
obsolescence is in dispute, property valuations could change using the alternative methods. TRD
pg_0003
House Bill 666/aHENRC/aHFL#1 – Page
3
reports changes in valuation are likely to be minor. If assessed values do decrease as a result of
this change, the impact depends on what the affected county requires from property tax
collections. If the county requires the revenue prior to this change in valuation, rates for all
property taxpayers will rise or fall to compensate for the change in valuation. The county could
keep the rates the same and the impact would come from tax collections.
TRD has provided an illustration of what would happen if the valuation were down 8 percent due
to the HENRC amendment. It estimates a decline of $2.5 million in property valuation
statewide. The county that would see the largest is San Juan followed by Bernalillo and Dona
Ana (Table).
Estimated
Loss in
Estimated
Percent
Assessed % of Total Loss/Shift
Total
of Total
County
Value Assessed
in
Obligations Obligations
San Juan
29,196,833
0.8 700,293 95,615,186
0.73
Bernalillo
9,981,643
0.1 419,683 435,271,076
0.1
Dona Anna
7,491,161
0.3 234,209 75,519,474
0.31
McKinley
6,075,899
1 211,577 20,850,187
1.01
Lea
4,213,000
0.2 114,839 64,538,371
0.18
Sandoval
2,849,264
0.2 82,931 55,906,362
0.15
Eddy
3,634,123
0.2 71,523 48,170,687
0.15
Santa Fe
2,688,325
0.1 68,904 104,907,897
0.07
Hidalgo
3,169,771
2.7 68,780 2,674,582
2.57
Chaves
2,147,058
0.3 56,775 20,865,164
0.27
Luna
2,326,718
0.7 50,689 7,546,152
0.67
Otero
1,687,133
0.2 48,830 18,018,686
0.27
Rio Arriba
1,903,442
0.1 43,083 40,314,249
0.11
Roosevelt
1,741,853
0.8 36,681 5,487,214
0.67
Valencia
1,155,562
0.1 35,330 22,818,557
0.15
Curry
1,520,663
0.3 34,017 11,458,201
0.3
Torrance
1,145,581
0.5 27,542 6,156,077
0.45
Taos
1,357,724
0.2 25,721 13,443,901
0.19
Lincoln
842,621
0.1 22,194 16,633,893
0.13
Socorro
691,757
0.4 20,804 5,398,415
0.39
Cibola
639,243
0.3 20,253 6,941,814
0.29
San Miguel
627,867
0.2 18,302 9,696,950
0.19
Grant
833,581
0.2 17,687 10,706,591
0.17
Sierra
675,198
0.3 16,461 4,756,414
0.35
Quay
582,404
0.5 15,487 2,895,108
0.53
Guadalupe
433,341
0.5 14,413 2,975,485
0.48
Catron
1,109,953
1.4 14,269 1,202,547
1.19
Colfax
547,955
0.1 13,690 11,589,882
0.12
Union
533,473
0.5 12,027 2,457,270
0.49
DeBaca
374,763
1 9,327
1,052,933
0.89
Mora
204,282
0.3 5,396
1,658,522
0.33
Harding
65,788
0.2 1,383
695,182
0.2
Los Alamos
5,896
0 123
12,021,752
0
Totals
92,453,872
2,533,224 1,140,244,782
Illustration: Potential Fiscal Impacts of Proposed Legislation (continued)
*8% of Total Electric
** Estimated loss in assessed value multiplied by weighted average nonresidential property tax rate.
Source: TRD
pg_0004
House Bill 666/aHENRC/aHFL#1 – Page
4
The oil and gas industry has experienced problems with claims of functional and economic
obsolescence. House bill 665, a similar bill for that industry, only defines these concepts in
statute. This bill goes an additional step for the electric industry and allows for an alternative
valuation. To the extent that the electric industry has had claims denied, the alternative valuation
methods would likely lead to either increased litigation or lower valuations.
ADMINISTRATIVE ISSUES
TRD:
The Department has performed several unitary valuations on properties of the type listed
in the proposal due to specific characteristics of the associated properties. The proposal,
as amended, would require approximately five additional unitary appraisals annually.
One FTE with salary and benefits totaling approximately $65,000 would be required to
accomplish this task.
OTHER ISSUES
TRD:
Unitary Assessment, Functional and Economic Obsolescence
The unit rule of appraisal is defined as "...an appraisal of an integrated property as a
whole without reference to the value of its component parts. The approach is based on a
view that informed buyers and sellers purchase or sell a viable operating unit, rather than
portions of the property. This procedure incorporates "going concern" value associated
with a customer base, as opposed to a new customer base a firm would need to develop if
it purchased only portions of an established business. The unit rule may be applied
appraisals based on the cost approach, comparable sales approach or income approach.
As indicated above, the cost approach to appraisal estimates market value by making a
series of adjustments to estimates of replacement cost, including allowances for economic
and functional obsolescence. The sales comparison approach essentially appraises
property by comparing the property to prices of similar properties that have recently sold
– with appropriate adjustments. The income approach estimates the amount of money a
typical purchaser would pay for a (typically income-producing) property based on the
income generating ability of the property.
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
HB 666 relates to HB665 and SB340 as far as proposing to use functional and economic
obsolescence as a factor for valuation. SB 874 is similar to HB 666 as amended and a duplicate
of the original.
NF/mt