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

SPONSOR Carraro

ORIGINAL DATE

LAST UPDATED

2/6/08

HB

SHORT TITLE Military Pension Income Tax Exemption

SB 504

ANALYST Francis

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

($30,100.0) Recurring General Fund

SOURCES OF INFORMATION

LFC Files

Responses Received From

Taxation and Revenue Department (TRD)

Department of Veterans’ Services (DVS)

SUMMARY

Synopsis of Bill

Senate Bill 504 exempts from the personal income tax the pensions of those taxpayers who either

have been honorably discharged from the armed forces of the United States and who served at

least 90 days on active duty or the spouse of such a member of the armed forces.

The exemption would apply for tax years beginning on or after January 1, 2009.

FISCAL IMPLICATIONS

The annual impact for exempting the retirement income of retired members of the armed forces

is expected to reduce personal income tax revenues by $19.7 million. Since the bill begins for

tax year 2009, the fiscal year impacts shown above assume that the full impact of tax year 2009

will occur in FY2010. The fiscal impact is based on 22,000 retired armed forces in New Mexico

with a total of $464 million in pension income. The assumed effective income tax rate is 4.3

percent based on TRD analysis.

Senate Bill 504 – Page

2

SIGNIFICANT ISSUES

DVS:

DVS does feel that this exemption would attract many more military retirees and these

retirees would benefit the local economies around the state. Most of these retirees are in

their 40’s and thus not only bring in the federal retirement dollars but would also bring

expertise to the local workforce. Many of these retirees start small businesses and create

jobs in the local area. These retirees also bring in their own insurance and financial

benefits to the area and thus reduce the strain on the local economic infrastructure. Many

states now offer some type of tax relief to military retirees and New Mexico has fallen

behind in attracting these very valuable assets.

The language in the bill refers to the spouse but not to a surviving spouse which may have been

the intent. A surviving spouse may be implicitly included because that would be one way for a

spouse to receive military pension income but the language could be more precise.

OTHER SUBSTANTIVE ISSUES

TRD:

Individuals with incomes and other circumstances similar to individuals receiving the

proposed exemption are likely to view it as unfair, especially when they compete with the

retirees for jobs and when the retirees have relatively high incomes. According to

information on the “military.com" website, military retirement pay can be over $9,000

monthly for high-ranking officers retiring in 2004.

The measure may encourage military retirees to move to New Mexico. These individuals

may possess substantial work skills that could benefit New Mexico economic development

efforts. It is sometimes argued that such individuals place lower demands on public spending

(education, law enforcement, etc.) than other segments of the population.

NF/jp