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F I S C A L I M P A C T R E P O R T
SPONSOR Harden
ORIGINAL DATE
LAST UPDATED
2/5/07
HB
SHORT TITLE Tax Credits For Low-Income Citizens
SB 482
ANALYST Francis
REVENUE (dollars in thousands)
Estimated Revenue
Recurring
or Non-Rec
Fund
Affected
FY07
FY08
FY09
($36,400.0)
($37,500.0) Recurring General Fund
(Parenthesis ( ) Indicate Revenue Decreases)
Conflicts with SB317, HB436
SOURCES OF INFORMATION
LFC Files
Taxation and Revenue Department
Responses Received From
Taxation and Revenue Department (TRD)
Department of Finance and Administration (DFA)
Human Services Department (HSD)
SUMMARY
Synopsis of Bill
Senate bill 482 creates a new personal income tax credit called the “State Earned Income Tax
Credit" (SEITC) that is calculated as 10 percent of the federal Earned Income Credit (EIC). The
credit is refundable, meaning if the credit exceeds the taxpayer’s liability, the excess is refunded
to the taxpayer. SB482 also explicitly excludes credits provided in the Income Tax Act from the
calculation of modified gross income.
The effective date is January 1, 2007.
FISCAL IMPLICATIONS
Enacting this credit would reduce general fund personal income tax revenue by $36.4 million per
pg_0002
Senate Bill 482 – Page
2
tax year. Even though the credit is for tax year 2007, it is assumed that it will be claimed in the
filing season in 2008 and so all of the impact is in FY08. The credit is expected to grow to $37.5
million in FY09.
In 2004, 199,552 New Mexican taxpayers received the federal EIC and 90 percent of the credits
were in excess of liability. A total of $364 million in EIC were claimed. Using this number as
the base, the cost to the state of the SEITC would be $36.4 million. Tax filers eligible for the
low-income comprehensive tax rebate (LICTR) will also be eligible for the SEITC.
SIGNIFICANT ISSUES
Twenty states, including the District of Columbia, currently offer a state level EIC (Colorado’s
EIC is tied to their TABOR rules and so some years they do not allow the credit). The credit has
proven to be a simple and efficient credit. It is also popular since it only goes to individuals and
families with earned income. One of the key elements is the refundability of the credit: the
taxpayer receives the full amount of the credit regardless of the tax liability. Twelve of the
seventeen state EICs are refundable, according to research at the Institute on Taxation and
Economic Policy. New York and Vermont have the most generous EICs allowing over 30
percent of the federal credit and making it refundable. Rhode Island has a 25 percent credit but it
is not refundable which restricts its effectiveness.
TABLE 1: STATE EARNED INCOME TAX CREDITS BASED ON THE FEDERAL EITC
State
Percentage of Federal
Credit
(Tax Year 2006
Except as Noted)
Refundable
Workers Without
Qualifying Children
Eligible.
Delaware
20%
No
Yes
District of Columbia
35%
Yes
Yes
Indiana
a
6%
Yes
Yes
Illinois
5%
Yes
Yes
Iowa
6.5%
No
Yes
Kansas
15%
Yes
Yes
Maine
5%
No
Yes
Maryland
b
20%
Yes
No
Massachusetts
15%
Yes
Yes
Michigan
10% (effective in 2008; to
20% in 2009)
Yes
Yes
Minnesota
c
Average 33%
Yes
Yes
Nebraska
8%
Yes
Yes
New Jersey
d
20%
Yes
No
New York
e, f
30%
Yes
Yes
Oklahoma
5%
Yes
Yes
Oregon
5% (to 6% in 2008)
Yes
Yes
Rhode Island
25%
Partially
g
Yes
Vermont
32%
Yes
Yes
Virginia
20%
No
Yes
Wisconsin
4% - one child
4% - one child
No
14% - two children
14% - two children
pg_0003
Senate Bill 482 – Page
3
TABLE 1: STATE EARNED INCOME TAX CREDITS BASED ON THE FEDERAL EITC
State
Percentage of Federal
Credit
(Tax Year 2006
Except as Noted)
Refundable
Workers Without
Qualifying Children
Eligible.
43% - three children
43% - three children
Notes: From 1999 to 2001, Colorado offered a 10% refundable EITC financed from required rebates under the state’s “TABOR" amendment.
Those rebates, and hence the EITC, were suspended beginning in 2002 due to lack of funds and again in 2005 as a result of a vot er-
approved five-year suspension of TABOR. Under current law, the EITC is projected to resume in 2010.
a Presently scheduled to expire in TY 2011.
b Maryland also offers a non-refundable EITC set at 50 percent of the federal credit. Taxpayers in effect may claim either the refundable
credit or the non-refundable credit, but not both.
c Minnesota’s credit for families with children, unlike the other credits shown in this table, is not expressly structured as a percentage of the
federal credit. Depending on income level, the credit for families with children may range from 25 percent to 45 percent of the federal credit;
taxpayers without children may receive a 25 percent credit.
d The New Jersey credit is available only to families with incomes below $20,000.
e The New York credit would be reduced automatically to the 1999 level of 20 percent should the federal government reduce New York’s
share of the TANF block grant.
f Beginning in 2006, New York also allows certain non-custodial parents who are making child support payments to claim an EITC that is the
greater of 20 percent of the federal EITC that they would be eligible for with one qualifying child as a custodial parent or 250 percent of the
federal EITC for taxpayers without qualifying children.
g Rhode Island made a very small portion of its EITC refundable effective in TY 2003. In 2006, the refundable portion was increased from 10
percent to 15 percent of the nonrefundable credit (i.e. 3.75 percent of the federal EITC).
Source: Economic Policy Institute (
www.epi.org
)
For a single or married taxpayer with no children, the cut-off for benefits is very low but for
taxpayers with children, the benefit goes to many more. The federal EIC can only be claimed if
someone is below the income cut-offs and
•
has a valid social security number
•
is not filing separately
•
is a US citizen or resident alien
•
does not have foreign income
•
does not have more than $2,800 in investment income
•
has some earned income.
Table one shows the cut-off and peak amounts and the maximum credit for each class of filer.
For example, a married filer with one child and adjusted gross income of between $8,000 and
$16,500 would receive the maximum federal credit of $2,747 (state credit = $275). The same
filer with income over $34,001 in adjusted gross income would receive no federal credit and,
thus, no state credit.
pg_0004
Senate Bill 482 – Page
4
Table 1: Federal Income Cut-offs for Earned Income Credit
Maximum
Credit
Cut-off
Start Finish
Single
No children
12,120
5,500
6,500
412
One child
32,001
8,500
14,500
2747
More than one child
36,348
11,500
14,500
4536
Married
No children
14,120
5,500
8,500
412
One child
34,001
8,000
16,500
2747
More than one child
38,348
11,500
16,500
4536
Source: IRS 2006 Tax Year
Peak
Adjusted
Gross Income
For filers without children, they must be age 25 to 65, not a qualifying child or dependent of
another person and must have lived in the United States for more than six months. For filers
with children, the children must be younger than 19, younger than 25 if a full time student, or
permanently disabled. The children also have to have lived with the filer for more than six
months and cannot be claimed as a qualifying child or dependent of another person.
Figure Two: State Earned Income Tax Credit Phase-out
0
100
200
300
400
Source: Based on TRD data
One of the features of the EIC is that it phases-out at higher incomes. Figure two, which is based
on 2005 data, shows the maximum average credit of about $400, which would be $4,000 for the
federal EIC, is reached at an income level of $13,000. This is an average of all tax filers, whether
single or not or childless or not.
CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP
SB317 and HB436 propose a working family’s credit similar to the SEITC proposed here but
would not allow the LICTR if the credit were claimed..
pg_0005
Senate Bill 482 – Page
5
ADMINISTRATIVE ISSUES
The Human Services Department reports that since the HB482 explicitly excludes credits from
the calculation of modified gross income, a calculation used to determine eligibility, there would
be minimal impact on the programs HSD administers such as food stamps or Medicaid.
NF/nt