February 15, 2017

Facing flat revenues, lawmakers prepare for new taxes

State lawmakers say revenues are no longer deteriorating but remain flat, and they are moving forward on a 2018 budget with proposals to infuse new revenue — including tax increases — to balance spending and replenish reserves.

A new consensus revenue estimate for fiscal year 2018 was expected to be released Wednesday but was pulled back for more study. Still, lawmakers said they do not expect a significant change from December, when economists were forecasting a $125 million deficit for the 2018 fiscal year, which begins July 1.

“I don’t believe there’s going to be a material change,” Sen. John Arthur Smith, D-Deming, told the Senate Finance Committee.

A forecast presented halfway through last year’s legislative session showed state revenues cratering from the collapse of crude oil prices. The price of West Texas crude had fallen to below $30 a barrel for a few weeks in early 2016. This year, the outlook is less dire. With production cuts taking hold in the Middle Eastern oil-producing countries, crude prices recovered to $53 this week.

Each $1 change up or down in the price of crude oil equates to $10 million more or less for the state’s general fund, which receives direct royalty payments from energy companies and gross receipts taxes on the sale and leasing of trucks, rigs and other equipment used in extraction.

The 2016 numbers forced lawmakers to make steep cuts to preliminary budgets. They had to return to the Capitol again for an October special session to make more cuts and to transfer unspent funds from several accounts to close budget gaps for the last fiscal year and the current one that ends in June.

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With general fund reserves now at 2 percent of the state’s $6 billion operating budget, it will take about $250 million in cuts or new revenue to pay for current services and to replenish the reserve balance to 3 percent or 4 percent, the bare amount needed for emergencies.

“This year, if it’s flat, that’s good news,” Sen. Steven Neville of Aztec, a senior Republican on the Senate Finance Committee, said of the revenue forecast. “The bad news is that it still means we need to make up $250 million by cutting more or raising revenue.”

“We know we have a problem,” added Sen. Carlos Cisneros, D-Questa, “and if we don’t deal with it, we’re going to find ourselves in another special session.”

Cisneros introduced a bill Wednesday, one day before the deadline for bill introductions, that would close a loophole that exempts nonprofit hospitals and health care providers from paying the state’s gross receipts tax. The bill has been discussed for months, and Cisneros said the measure was drafted in conjunction with hospital executives at Holy Cross Hospital in Taos and has the support of other health care providers in the state.

If enacted, Senate Bill 433 would raise an estimated $60 million a year, with the revenue earmarked for the state’s Medicaid program.

Cutting federal spending for Medicaid is a priority for the Trump administration and the Republican Congress, especially rolling back the money spent to expand coverage to low-income adults under the Affordable Care Act, including some 225,000 New Mexicans.

Cisneros said the hospitals have benefited from having more insured patients. “They realize the dilemma the state is in. They realize it’s a crisis. They want to do what they can to assist,” he said.

Another measure introduced Wednesday would allow the state to collect gross receipts taxes on food with “minimal or no nutritional value.”

Sponsored by Sen. George Muñoz, D-Gallup, Senate Bill 416 calls on the state to issue rules to collect the tax on items such as candy, baked and fried goods, frozen desserts, pudding, pastries, fruit juice, sweetened beverages and snack chips. There is no analysis yet of how much money the state could raise by taxing those items.

A key House Republican said Wednesday his caucus is on board with closing tax loopholes for some nonprofit health providers and collecting the gross receipts tax on internet sales. He said Republicans will support a budget with more revenue as long as it is equitable.

“There are some areas we have leveled the playing field. Those are on the table for us,” said Larry Larrañaga, ranking Republican on the House Appropriations and Finance Committee.

He said the committee has worked to identify another $60 million in general fund capital projects that can be reverted back to the operating budget and used to shore up reserves.

But he said the state is having financial problems because New Mexico families and businesses are having financial problems. “What I don’t want us to do is put an additional tax burden on the general public,” he said.

Gov. Susana Martinez, a Republican who has promised not to raise taxes in her term, has not taken a position on either the hospital bill or the internet measure.

Smith told his committee Wednesday that lawmakers have tapped into every available unspent dollar as reserves have plummeted from over $700 million at the end of 2015 to about $120 million today.

“We’ve hit every nook and cranny we can find,” Smith said. If there is no new revenue, the public should expect more cuts to public education, colleges and health care. “Without an uptick in revenues, that’s where we are today.”

Also Wednesday, Paul Gessing, president of the Rio Grande Foundation, a free-market think tank, was raising the alarm about the rush to raise taxes. He said New Mexico spends more as a percentage of the gross domestic product than any of its neighbors, the fourth-highest rate in the nation behind only Alaska, Hawaii and Vermont.

“The refrain that New Mexico government is somehow starved for revenue may sound logical,” Gessing said in an email, “but once you actually look at the data, it falls apart.”

Contact Bruce Krasnow at brucek@sfnewmexican.com.