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

SPONSOR Cravens

ORIGINAL DATE

LAST UPDATED

2/6/08

HB

SHORT TITLE Taxpayer Protection Act

SB 513

ANALYST Schardin

APPROPRIATION (dollars in thousands)

Appropriation

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

(See Narrative)

Recurring

General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Companion to SJR 15

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY08

FY09

FY10

See Narrative

Nonrecurring Severance Tax

Permanent Fund

See Narrative

Nonrecurring General Fund

(Parenthesis ( ) Indicate Revenue Decreases)

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Finance and Administration (DFA)

Attorney General’s Office (AGO)

SUMMARY

Synopsis of Bill

Senate Bill 513 enacts the taxpayer protection act. During the 2009 regular legislative session,

the act would require the legislature to limit expenditures for the FY10 budget to the FY08

budget plus growth of 3.6 percent plus the state population growth rate for the most recent

calendar year for which an estimate is available from UNM’s bureau of business and economic

research. During the 2010 regular legislative session (FY11 budget) and every year thereafter,

Senate Bill 513 – Page

2

the expenditure limit would be the previous fiscal year’s budget plus growth of 3.6 percent plus

the New Mexico population growth rate.

The bill also provides that in the event revenue collected in a fiscal year exceeds the expenditure

limit, 60 percent of the unexpended or unencumbered balance will be deposited in the Severance

Tax Permanent Fund (STPF) and 40 percent will be rebated by TRD on an equal per capita basis

to all non-dependent persons over 18 years of age filing a New Mexico personal income tax

return in the calendar year in which the excess is determined. Rebates will not be awarded to

persons who were inmates of public institutions for more than six months of the tax year or who

were not residents of New Mexico on the last day of the tax year. If a taxpayer is owed a rebate,

the rebate will first be applied to taxes owed, and if a refund is owed, the rebate will be added to

the refund.

The bill will become effective on January 1 following adoption by New Mexico voters of an

amendment to the state constitution entitled, “A JOINT RESOLUTION PROPOSING

AMENDMENT TO ARTICLE 4 OF THE CONSTITUTION OF NEW MEXICO TO LIMIT

THE LEGISLATURE’S ABILITY TO INCREASE STATE EXPENDITURES." Senate Joint

Resolution 15 proposes a constitutional amendment with this title.

FISCAL IMPLICATIONS

If adopted, this constitutional amendment would decrease the average rate of appropriation

growth and decrease reserve fund balances by mandating that revenues in excess of the

expenditure limit be transferred to the STPF and refunded to taxpayers. It is difficult to estimate

how much the constitutional amendment would reduce expenditures, but the chart below

illustrates how general fund expenditures would have been different if an identical expenditure

limit had been in place since FY96.

General Fund Expenditures: Actual vs. Limit Proposed by SB 513

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

$6.0

$6.5

FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07* FY08* FY09**

Actual Recurring General Fund Expenditures

Result of SB 513 Expenditure Limit

* Preliminary; ** LFC Recommendation

Senate Bill 513 – Page

3

The chart below compares actual general fund expenditure growth with the limit that would have

applied if the provisions of the proposed constitutional amendment had been in place. While

expenditure growth averaged 6.2 percent between FY96 and FY09, it fluctuated from 0.6 percent

in FY03 to 11.0 percent in FY08. Fluctuations in expenditure growth rates are attributable

primarily to volatility in energy-related revenues. The limit proposed in the resolution would

have been lower than average expenditure growth in every year.

Actual General Fund Expenditure Growth vs. SB513 Limit

0%

2%

4%

6%

8%

10%

12%

FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07* FY08* FY09**

Actual Spending Growth Rate (%)

Proposed limit

Average Growth = 6.2%

Average Growth Rate: 6.2%

* Preliminary; ** LFC Recommendation

Proposed Limit

The earliest time the bill could have a fiscal impact would be in the FY11 budget, which is

enacted in spring of 2010. DFA estimates that if provisions in the bill had been in place in the

past decades, the average annual rebate check would be about $35 per person and that the STPF

corpus would have grown by an additional $66 million.

The general fund receives a constitutional distribution equal to 4.7 percent of the five-year

average market value of the STPF. By mandating that 60 percent of revenue that exceeds the

expenditure limit is distributed to the STPF, the bill would indirectly increase general fund

revenue.

SIGNIFICANT ISSUES

UNM’s Bureau of Business and Economic Research (BBER) projects that New Mexico’s

population will grow by about 1.3 percent per year in the near future. If these projections are

correct, the proposed constitutional amendment would limit state expenditure growth to about

4.9 percent per year (1.3 percent plus 3.6 percent).

By basing each year’s expenditure limit on the prior year’s expenditure limit rather than on the

prior fiscal year’s actual expenditures, the proposal avoids one of the most troubling aspects of

Senate Bill 513 – Page

4

similar amendments that have been approved in other states. Many other states’ limits base the

limit on actual prior year expenditures so that a sharp revenue and expenditure decline in one

year reduces expenditure limits in all future years. This proposal would allow state expenditures

to recover from temporary revenue shortfalls.

Expenditure limits such as the one proposed may be unreasonable for government programs.

Many government programs exist due to the failure of private markets to provide services

deemed necessary by society. For example, government health programs are designed to serve

individuals who cannot afford purchasing private insurance or whose expensive health care

needs lead private health insurers to deny them coverage. The presence of such market failures

suggests the costs of many government services should be expected to grow faster than many

private sector costs. In addition, many state programs are federally mandated, taking expenditure

choice away from state policymakers.

The bill limits expenditure growth in FY11 and beyond using the prior fiscal year as a base.

However in FY10, the base is two years prior (FY08). By basing the FY10 expenditure limit on

FY08 instead of FY09, the bill eliminates one year of natural expenditure growth.

The act requires rebates of excess revenue to personal income tax filers to be sent in the calendar

year in which the excess is determined. If excess revenue is determined to exist at the end of

FY11, the calendar year of determination will be CY11. Since personal income tax returns for

CY11 will not be filed until spring of CY12, the bill would delay payment of FY11 rebates until

spring of CY12 or spring of CY13.

In the event that a small amount of excess revenue exists at the end of a fiscal year, the bill

would still require TRD to send very small rebate checks to all personal income tax filers. If the

amount of excess revenue is small enough, the costs of issuing rebate checks could outweigh the

benefits of the rebates. Consider amending the bill so that unless excess revenue exceeds a

certain percent of personal income tax liabilities the entire amount of excess revenue is

distributed to the severance tax permanent fund. Suggested language may be found in Section 6-

4-5 NMSA 1978, which states that refunds to taxpayers from the taxpayers dividend fund only

occur if the balance of the fund exceeds one percent of the tax liabilities reported to TRD during

the fiscal year (currently about $10 million).

PERFORMANCE IMPLICATIONS

Proponents of the proposal believe that it will force government programs to control cost

increases become more efficient. Opponents fear that the expenditure limit will leave critical

government programs without adequate funding.

ADMINISTRATIVE IMPLICATIONS

Administrative costs to TRD for the rebates would be high. Before rebates of excess revenue

could be sent, TRD would have to know the total number of eligible filers. This would not be

known by the time personal income tax refunds are currently sent, so the rebate would either

have to be sent separately or along with the following tax year’s refunds,

It is unclear which department will be responsible for calculating the expenditure limit required

by the bill.

Senate Bill 513 – Page

5

COMPANIONSHIP

Senate Bill 513 is a companion to Senate Joint Resolution 15. The provisions of Senate Bill 513

will become effective on January 1 following adoption by the state’s voters of the constitutional

amendment proposed in Senate Joint Resolution 15. However, the language in Senate Joint

Resolution 15 does not tie completely to language in Senate Bill 513.

TECHNICAL ISSUES

It is unclear whether a revision to state population growth could require expenditure reductions

in a fiscal year that has already begun.

On page 3, line 22 and page 4, line 2, the reference to “unexpended or unencumbered balance" in

the general fund is not in sync with the state’s recent adoption of modified accrual accounting.

The terms “unexpended" and “unencumbered" applied previously when the state operated on a

cash accounting basis.

The resolution does not clearly define the base on which the expenditure limit is calculated. The

intent may be for “state expenditures" to mean only those contained in the general appropriation

act (GAA). However, limiting GAA appropriations could have the unintended consequence of

increasing special, supplemental and deficiency appropriations as well as capital outlay

expenditures. Additionally, the GAA contains federal funds and other non-state sources.

The resolution does not state whether revenues deposited in reserve funds will count toward the

expenditure limit. If so, building reserves will be in competition with all other state spending.

If the intent of the bill is to grow the FY10 budget over the FY09 base rather than the FY08 base,

the bill should be amended to replace the number “2008" with “2009" on page 3, lines 5, 11 and

14.

It is unclear how TRD will know which taxpayers were inmates of a public institution for more

than six months during the tax year for which a rebate is issued. The bill could be amended to

require that necessary departments cooperate with TRD to determine the list of taxpayers who

were inmates for more than six months during the previous tax year.

DFA notes that if a rebate check mailed by TRD were returned, a taxpayer would need to pursue

their rebate amount through unclaimed property rules.

SS/bb