Fiscal impact reports (FIRs) are prepared by the Legislative Finance Committee (LFC) for standing finance
committees of the Legislature. LFC does not assume responsibility for the accuracy of these reports if they
are used for other purposes.
F I S C A L I M P A C T R E P O R T
SPONSOR Block
/Mejia/Dow
LAST UPDATED
ORIGINAL DATE 3/6/25
SHORT TITLE Childbirth Income Tax Credit
BILL
NUMBER House Bill 542
ANALYST Torres
REVENUE*
(dollars in thousands)
Type FY25 FY26 FY27 FY28 FY29
Recurring or
Nonrecurring
Fund
Affected
PIT
($138,000) to
($150,500)
($136,000) to
($150,500)
($133,300) to
($150,500)
($128,000) to
($150,500)
Recurring General Fund
Parentheses ( ) indicate revenue decreases.
*Amounts reflect most recent analysis of this legislation.
Sources of Information
LFC Files
Agency Analysis Received From
State Ethics Commission (SEC) Early Childhood Education and Care Department (ECECD) Taxation and Revenue Department (TRD)
SUMMARY
Synopsis of House Bill 542
House Bill 542 establishes the Childbirth Income Tax Credit, providing a $7,000 refundable
income tax credit to New Mexico residents who give birth to a child during the taxable year. The
credit is available to individual taxpayers who are not claimed as dependents on another tax
return and applies for taxable years beginning on or after January 1, 2025.
To claim the credit, a taxpayer must obtain certification from the Children, Youth, and Families
Department (CYFD), which will verify eligibility and issue certificates of qualification. CYFD
must also electronically report all issued certifications to the Taxation and Revenue Department
(TRD) at regular intervals. Only one credit may be issued per taxpayer per taxable year.
If the credit amount exceeds a taxpayer’s total income tax liability, the excess will be refunded.
The bill allows taxpayers to claim the credit within three taxable years following the year in
which the birth occurred and certification was granted. Additionally, the fiscal impact of the
credit must be reported annually.
House Bill 542 – Page 2
FISCAL IMPLICATIONS
House Bill 542 introduces a new refundable tax credit, which will reduce state personal income
tax (PIT) revenue. Because the credit is refundable, eligible taxpayers will receive the full $7,000
benefit regardless of their income tax liability, creating a direct cost to the general fund.
The total fiscal impact will depend on the number of births in New Mexico each year. Based on
recent birth rate data, New Mexico records approximately 21.5 thousand babies born each year.
If all eligible births result in a claimed credit, the total annual cost to the state could be $150.5
million.
According to the Taxation and Revenue Department (TRD), the number of births from 2016 to
2023 has fallen by an average of 2.7 percent per year and could continue to fall at this rate.
Under this assumption and using linear and logarithmic regressions, TRD estimated costs
reflected by the lower bound estimate on page 1.
There may be additional administrative costs for CYFD and TRD because CYFD will be
responsible for processing applications and issuing certifications, while TRD must verify claims,
process refunds, and track the fiscal impact of the credit. These costs are expected to be moderate
and recurring as long as the credit remains in effect.
This bill creates or expands a tax expenditure with a cost that is difficult to determine but likely
significant. LFC has serious concerns about the substantial risk to state revenues from tax
expenditures and the increase in revenue volatility from erosion of the revenue base. The
committee recommends the bill adhere to the LFC tax expenditure policy principles for vetting,
targeting, and reporting or action be postponed until the implications can be more fully studied.
SIGNIFICANT ISSUES
The Childbirth Income Tax Credit is intended to provide financial relief to new parents,
recognizing the economic costs associated with childbirth and early child-rearing. By making the
credit fully refundable, the bill ensures that families, including those with little or no state tax
liability, receive the full benefit of the credit.
However, the bill does not include income eligibility limits, meaning all taxpayers who give
birth—regardless of income level—are eligible for the same $7,000 benefit. This differs from
many existing child-related tax credits, which often phase out at higher income levels to target
low- and middle-income families.
Another policy consideration is the bill’s potential impact on birth rates. While the credit may
encourage higher birth rates, its effectiveness in doing so is uncertain. Studies on financial
incentives and birth rates have produced mixed results, and other socioeconomic factors, such as
housing costs, access to childcare, and healthcare availability, also influence reproductive
decisions.
House Bill 542 – Page 3
According to the Taxation and Revenue Department:
Personal income tax (PIT) represents a consistent source of revenue for many states. For
New Mexico, PIT is approximately 16 percent of the state’s recurring general fund
revenue. While this revenue source is susceptible to economic downturns, it is also
positively responsive to economic expansions. New Mexico is one of 41 states, along
with the District of Columbia, that impose a broad-based PIT (New Hampshire and
Washington do not tax wage and salary income). Like several states, New Mexico
computes its income tax based on the federal definition of taxable income and ties to
other statues in the federal tax code. This is referred to as “conformity” to the federal tax
code. PIT is an important tax policy tool that has the potential to further both horizontal
equity by ensuring the same statutes apply to all taxpayers, and vertical equity, by
ensuring the tax burden is based on taxpayers’ ability to pay.
The proposed child tax credit will erode horizontal and vertical equity in the personal
income tax. By basing the credit on giving birth to a child, taxpayers with the same level
of income are no longer treated equally, thus eroding horizontal equity. The bill also
creates inequity for taxpayers who adopt children or choose surrogacy. The credit also
erodes vertical equity by maintaining the same level of credit regardless of income. This
credit is in part duplicative of the Child Income Tax Credit, which provides a credit to
every taxpayer with a dependent child every year, including newborn infants. This
proposal would represent an additional form of a child tax credit. Child tax credits can be
an important tool to provide economic aid to families with children and is particularly
helpful to lower income families.
The State Ethics Commission adds concerns related to violations of the Anti-Donation Clause,
finding:
HB542 potentially implicates Article IX, Section 14, of the New Mexico Constitution
(the Anti-Donation Clause) by, in effect, creating circumstances where the state may
directly pay public funds to families when a child is born.
Whether the proposed tax credit is constitutional under the Anti-Donation Clause requires
a relatively straight-forward test derived by the courts: First, has the state made a
donation or pledged its credit in aid of any person, association, or corporation? Second, if
“yes”, does an enumerated exception apply? Insofar as HB542 is concerned, the answers
will likely be “yes” and “no,” respectively.
First, generally, refundable tax credits raise concerns under the Anti-Donation Clause
because a refundable tax credit can cause the state to make a payment to a private
individual or corporation, potentially resulting in an unconstitutional subsidy. See
Chronis v. State ex rel. Rodriguez, 1983-NMSC-081, ¶ 30 (finding a tax credit given to
the liquor industry an unconstitutional subsidy). Since the proposed tax credit here
operates as a kind of gift to a taxpayer, as there is no clear action under the terms of the
bill under which the credit could be viewed as an offer in exchange for the credit (if the
state receives something of value in exchange for the transfer of funds, it is not a
donation), the proposed tax credit likely constitutes a donation, satisfying the first part of
the above test.
As to the second question, under the terms of HB542, it is not clear that any of the
enumerated exceptions to the Anti-Donation Clause would apply. The Anti-Donation House Bill 542 – Page 4
Clause does contain an exception for the care and maintenance of sick or indigent
individuals, see N.M. Const. art. IX, § 14(A), however, while the tax refund may result in
a donation going to indigent residents or sick residents, HB542 is not drafted in a manner
so as to specifically provide for the care and maintenance of such individuals. As such,
the proposed credit would likely run afoul of the Anti-Donation Clause because it creates
a donation on behalf of the State and there are no applicable exceptions to the clause.
Outside from any Anti-Donation Clause implications, the tax credit is only applicable
once per year. This means that if an individual gives birth to twins, triplets, etc., or more
than one child in a year they would still only receive a tax credit calculated for one child.
TECHNICAL ISSUES
As written, the baby born does not have to be in New Mexico, only that the taxpayer giving birth
is a New Mexico resident.
TRD notes:
This bill, as written, is only available to a taxpayer “who gives birth to a child.” This
language is ambiguous for several reasons.
1. Requirement for Physical Childbirth:
The current language of the bill specifies that the taxpayer must physically give
birth to a child to claim credit, potentially excluding parents who become legal
parents through surrogacy or adoption unless the language is amended to include
these scenarios (see Other Issues).
2. Taxpayer who gives birth to a child does not claim the credit:
In a situation where the taxpayer who gave birth to the child does not claim the
credit (such as a death of a parent), the child may live with their other parent who
did not give birth. This parent who did not give birth but has guardianship would
not receive the benefit of this credit.
3. Taxpayer Claiming Child as Dependent:
For unmarried parents, the bill should specify that the taxpayer who claims the
child as a dependent for federal tax purposes is eligible for the full credit. This
avoids potential disputes about who can claim the credit. Also, language
concerning married filing separate filers is not included but may be necessary.
OTHER SUBSTANT IVE ISSUES
In assessing all tax legislation, LFC staff considers whether the proposal is aligned with
committee-adopted tax policy principles. Those five principles:
Adequacy: Revenue should be adequate to fund needed government services.
Efficiency: Tax base should be as broad as possible and avoid excess reliance on one tax.
Equity: Different taxpayers should be treated fairly.
Simplicity: Collection should be simple and easily understood.
Accountability: Preferences should be easy to monitor and evaluate
House Bill 542 – Page 5
In addition, staff reviews whether the bill meets principles specific to tax expenditures. Those
policies and how this bill addresses those issues:
Tax Expenditure Policy Principle Met? Comments
Vetted: The proposed new or expanded tax expenditure was vetted
through interim legislative committees, such as LFC and the Revenue
Stabilization and Tax Policy Committee, to review fiscal, legal, and
general policy parameters.
Targeted: The tax expenditure has a clearly stated purpose, long-term
goals, and measurable annual targets designed to mark progress toward
the goals.
Clearly stated purpose
Long-term goals
Measurable targets
Transparent: The tax expenditure requires at least annual reporting by
the recipients, the Taxation and Revenue Department, and other relevant
agencies
?
Accountable: The required reporting allows for analysis by members of
the public to determine progress toward annual targets and determination
of effectiveness and efficiency. The tax expenditure is set to expire unless
legislative action is taken to review the tax expenditure and extend the
expiration date.
Public analysis ?
Expiration date
Effective: The tax expenditure fulfills the stated purpose. If the tax
expenditure is designed to alter behavior – for example, economic
development incentives intended to increase economic growth – there are
indicators the recipients would not have performed the desired actions
“but for” the existence of the tax expenditure.
Fulfills stated purpose
Passes “but for” test
Efficient: The tax expenditure is the most cost-effective way to achieve
the desired results.
?
Key: Met Not Met ? Unclear
IT/hj/hg