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

SPONSOR Smith

ORIGINAL DATE

LAST UPDATED

2/27/07

HB

SHORT TITLE Food & Health Care Tax Deduction Distribution

SB 1182

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY07

FY08

FY09

$300.0

$651.0 Recurring General Fund

(300.0)

($651.0) Recurring

Local

Governments

(Parenthesis ( ) Indicate Revenue Decreases)

Relates to SB 530

SOURCES OF INFORMATION

LFC Files

Responses Received From

New Mexico Municipal League (NMML)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of Bill

Senate Bill 1182 amends Sections 7-1-6.46 and 7-1-6.47, which were enacted in 2004 as part of

the legislation to create gross receipts tax deductions for food and medical services (HB 625).

Those sections hold counties and municipalities harmless from the food and medical service

deductions by requiring TRD to distribute to each local government an amount equal to what

would have been received if the deductions did not exist.

Senate Bill 1182 freezes the hold harmless distributions to local governments at the rate of the

local option tax imposed as of January 1, 2007 rather than the current local option tax rate

imposed at the time of the distribution.

FISCAL IMPLICATIONS

The bill will cause a gradual shift of revenue from local governments to the general fund as local

option tax rates gradually creep higher. TRD reports that in the recent past, the local option gross

Senate Bill 1182 – Page

2

receipts tax rate have increased by about 0.01 percent per year. Statewide, food and medical

deductions are expected to total $3.1 billion in FY08. An additional 0.01 percent tax would cause

a shift of about $310 thousand ($3.1 billion X 0.0001). The fiscal impact will grow over time as

local option tax rates creep higher and the size of the deductions grows. The table above assumes

rates continue to increase by 0.01 percent per year and that the deductions grow by 5 percent per

year.

SIGNIFICANT ISSUES

Current law requires TRD to transfer to each county and municipality an amount equal to what

would have been received if the food and medical service deductions enacted in 2004 did not

exist. That amount is calculated by multiplying deductions by the local option tax rate imposed

in the area. These distributions are meant to hold local governments harmless from any revenue

loss associated with the food and medical deductions.

As local option tax rates creep higher, the size of the hold harmless distributions the state pays

local governments grow larger. The bill protects the state general fund from losing additional

revenue as local governments impose higher local option gross receipts taxes.

Alternatively, the bill limits local governments’ ability to raise revenue through imposing higher

local option gross receipts taxes. All increments imposed after January 1, 2007 would generate

less revenue due to the provisions of the bill. Therefore, the bill reduces the state’s 2004

commitment to hold local governments harmless to the food and medical deductions.

Medical service receipts tend to grow faster than the rest of the gross receipts tax base, and food

receipts are one of the more stable parts of the tax base. The bill will therefore slightly reduce the

rate of growth in local government gross receipts tax revenues and slightly increase revenue

volatility.

Currently, New Mexico’s local governments are authorized to impose up to 4.6875 percent of

local option gross receipts taxes (that figure excludes several additional local option taxes that

have been authorized for selected local governments). On average, a local option gross receipts

tax of about 1.6 percent is actually imposed by local governments statewide. Combined with the

state gross receipts tax of 5 percent, the statewide tax rate is therefore 6.6 percent.

ADMINISTRATIVE IMPLICATIONS

The administrative impact on TRD will be minimal.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

Senate Bill 1182 relates to Senate Bill 530 as amended by the Senate Finance Committee. Senate

Bill 530 expands the definition of a retail food store eligible for the gross receipts tax deduction

for food to establishments with over 75 percent of sales attributable to water, ice and coffee. The

Senate Finance Committee amendment to Senate Bill 530 inserted language identical to that

found in Senate Bill 1182.

SS/csd