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

SPONSOR Sandoval

ORIGINAL DATE

LAST UPDATED

2/26/07

HB 1254

SHORT TITLE Low and Middle Income Taxpayer Exemptions

SB

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

(19,100.0)

(19,100.0) Recurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

House Bill 1254 expands the income thresholds for the exemption for low- and middle-income

taxpayers.

Be

g

in Phase-

out Max Income Begin Phase-out Max Income

Be

g

in Phase-

out Max Income

Current Law

24,000

$

40,667

$

16,000

$

27,110

$

12,000

$

20,333

$

HB1254

36,000

$

61,000

$

24,000

$

40,667

$

18,000

$

30,500

$

Married/Head of

Household

Single

Married Filing

Separately

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.

House Bill 1254 – Page

2

FISCAL IMPLICATIONS

TRD estimates the fiscal impact to be $19.1 million in FY08:

Fiscal impacts were estimated using information from state income tax returns. Increased

exemptions will be claimed on an estimated 236 thousand tax returns filed by New

Mexico residents, claiming $18.5 million in tax savings for an average savings per return

of $78. Non-resident taxpayers will claim an estimated $700 thousand in tax savings.

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.

SIGNIFICANT ISSUES

The average tax relief per return is $78 as shown in the table below:

Married

Joint Single

Head of

Household

Married

Separate All Returns

Average Tax Relief $118 $43

$78

$57

$78

Source: TRD

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.

0

500

1000

1500

2000

2500

3000

Adjusted Gross Income

HB1254

Current Law

House Bill 1254 – Page

3

OTHER SUBSTANTIVE ISSUES

TRD:

The following figure displays tax savings per return as a function of Adjusted Gross

Income (“AGI") for all taxpayers under the present law personal exemption and with the

proposed changes in House Bill 1254. As the figure shows, the present law benefits are

subject to a “cliff" because benefits are truncated by the limit on AGI before the formula

reduces the benefit to zero. For households eligible for benefits under present law, the

additional benefits due to House Bill 1254 are shown in the figure as the areas above their

present benefit, i.e. the height of the “Proposed Law" line represents total combined

benefits for these households, not the incremental benefits due to House Bill 1254.

Savings Per Return by Income Group:

All Taxpayers

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

Adjusted Gross Income

Present Law

Proposed Law

NF/csd