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

SPONSOR Begaye

ORIGINAL DATE

LAST UPDATED

1/23/08

2/12/08 HJM 7/aHTRC/aSRC

SHORT TITLE Study Coal Surtax

SB

ANALYST Francis

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Energy Minerals and Natural Resources (EMNRD)

SUMMARY

Synopsis of SRC Amendment

The Senate Rules Committee amended House Joint Memorial 7 to remove language regarding

the comparison among adjacent states and changed “a tax inequity" to “tax variances."

Synopsis of HTRC Amendment

The House Taxation and Revenue Committee amended House Joint Memorial 7 requiring that

the Revenue Stabilization and Tax Policy interim committee have a “full discussion" about the

coal surtax rather than the committee doing a study and having a hearing on the issue.

Synopsis of Original Bill

House Joint Memorial 7 request the interim Revenue Stabilization and Tax Policy Committee

study the New Mexico coal surtax in the 2008 interim. The study should include an economic

and marketing analysis, review of industry studies, and a review of new technologies in the coal

mining industry. The study should be presented in a RSTP hearing before December 1, 2008.

FISCAL IMPLICATIONS

There will be an operating budget impact of unknown amount to conduct the study.

SIGNIFICANT ISSUES

EMNRD:

According to data compiled by Energy, Minerals and Natural Resources Department,

coal is the most valuable mineral commodity (not including oil or gas) produced in New

Mexico with over 26 million tons produced in 2006 at a value of $718 million.

Approximately 1500 people are employed in the coal industry with a payroll of $98

House Joint Memorial 7/aHTRC/aSRC – Page

2

million. Coal is the leader among hard mineral commodities in generating revenue for

state government. A total of $26.5 million was paid by coal producers in severance and

resource taxes and state trust land payments in 2006. New Mexico was the 13th largest

coal producing state in 2006; New Mexico’s coal production has remained fairly static

for the past dozen years.

TRD:

Pursuant to Section 7-26-6, the severance surtax rate is actually sixty cents ($.60) for

surface coal. After being indexed to the 2006 producer price index for coal, the surtax in

2007 was eighty cents ($.80) for surface coal. The effective total tax rate on New Mexico

coal of approximately thirteen percent (13%) in 2007 included the gross receipts tax, the

excise tax, the conservation tax, the severance tax, and the severance surtax. Coal mined

on Indian lands is eligible for the Intergovernmental Tax Credit that can be subtracted

from the severance and surtax liability. The tax credit is equal to the lesser of seventy-

five percent (75%) of the tax imposed by the Indian Nation or the aggregate amount of

severance and surtax due to the state. Section 7-26-6 also imposed a severance surtax rate

of $.58 per ton of mined underground coal. This rate is also indexed to the producer price

index for coal. In 2007, the indexed severance surtax rate was $.77.

During the 2007 legislative session, SB220 and HB1190 proposed to eliminate the coal

severance surtax. At that time, a fiscal impact report prepared by the Tax Research and

Statistics Office estimated a $6.9 million annual recurring loss of revenues.

Under present law, the severance surtax rate is “indexed," meaning that the rate is

increased periodically if the average price of coal increases. This provision was adopted

to insure that severance tax revenues would increase along with any significant increase

in the sales value of coal. In contrast, the severance tax on coal is not indexed. It is set at

a fixed rate of $0.57 per ton for surface-mined coal and $0.55 per ton for underground

mined coal. Thus, one implication of eliminating the surtax would be that total

collections of severance taxes and surtaxes would not recognize any increases in the

value of coal. If the value of coal increases in the future, this will have the effect of

reducing the average effective tax rate on the coal when the latter is measured as a

percent of value.

Since elimination of the surtax would reduce revenue to the Severance Tax Bonding

Fund, and since the State has severance tax bonds outstanding for which these revenues

are pledged, the State Board of Finance should be consulted about the potential impacts

of the revenue decrease on the financial status of the bonds.

NF/mt