Summary:

 House Bill 325 (HB 325) creates gross receipts tax deductions for compensation received for labor performed during the construction of new residential housing and for the sale of newly constructed residential housing. The bill also establishes a hold harmless distribution to municipalities and counties to offset revenue losses resulting from these deductions. HB 325 takes effect on July 1, 2025. 

Legislation Overview:

 House Bill 325 (HB 325) introduces two new gross receipts tax deductions within the Gross Receipts and Compensating Tax Act. The first deduction applies to receipts from compensation for labor performed during the construction of new residential housing, while the second deduction applies to receipts from the sale of new residential housing. However, taxpayers cannot claim both deductions for the same transaction within a twelve-month period. The bill defines residential housing to include single-family residences, townhouses, condominiums, and apartment buildings.

HB 325 also creates a hold harmless distribution to municipalities and counties. The distribution is based on the total amount of deductions claimed within the jurisdiction and is calculated using the combined rate of local option gross receipts taxes in effect at the time of the deductions. The New Mexico Taxation and Revenue Department will administer these deductions and distributions, requiring taxpayers to separately report deductions claimed. The deductions will be included in the tax expenditure budget, ensuring legislative oversight of their fiscal impact.

Implications

HB 325 is expected to reduce gross receipts tax revenue at both the state and local levels by allowing deductions for labor compensation and home sales. While the bill provides a hold harmless distribution to municipalities and counties, it does not offer a similar mechanism to compensate for lost state revenue. The impact on local governments will vary depending on the volume of qualifying construction activity within each jurisdiction. The inclusion of the deductions in the tax expenditure budget ensures that their costs will be periodically reviewed.

The deductions may incentivize new residential construction, potentially supporting housing affordability and development. However, because taxpayers cannot claim both deductions for the same property within a twelve-month period, the practical effects on construction businesses and housing markets may be limited. The administrative requirements for tracking deductions and calculating distributions may impose additional costs on the Taxation and Revenue Department. 

Current Law:

 Under current law, no specific gross receipts tax deductions exist for compensation received for labor performed during residential housing construction or for the sale of newly constructed residential housing. Construction labor is generally subject to gross receipts tax unless otherwise exempted, and sales of new residential housing are fully taxable. Local option gross receipts tax rates vary by jurisdiction, and no automatic hold harmless distributions are provided to municipalities or counties when tax deductions reduce revenue. HB 325 introduces targeted deductions and a mechanism to mitigate local revenue losses while shifting some of the fiscal impact to the state level.