March 8, 2017

In late-night vote, House moves to close tax loopholes

An effort to eliminate hundreds of tax breaks for dozens of businesses and service providers while lowering the overall tax rate on sales is moving forward in the Legislature and may become part of a solution to fix New Mexico’s budget deficit for years to come.

The measure, sponsored by Rep. Jason Harper, R-Rio Rancho, passed the House of Representatives late Wednesday with no dissenting votes.

The initiative had been broadly scaled back from what Harper first proposed with the introduction of House Bill 412, which now has a prime focus on reforming the state’s cumbersome gross receipts tax law. Initial measures to extend that tax to food, as well as changes to income tax rates and how property is valued, were removed from the bill in what House Speaker Brian Egolf called “the largest substitution in the history of the House floor.”

Harper accepted the amendments from Rep. Carl Trujillo, D- Santa Fe, as the only realistic way his reforms would move forward. The bill as passed closes a range of loopholes adopted over decades that grant exemptions and reductions in the gross receipts tax, a primary source of revenue for both the state and local governments.

Related: Harper: Tax policy overhaul paves way for state’s future

Depending on what happens in the New Mexico Senate, if the measure becomes law it might affect everything from web hosting to newspaper sales to health care, lottery sales, agriculture and construction.

“I believe that the bill we presented is a great compromise,” Harper told the House on Wednesday night. “It pains me to see these things change, but I’m not going to let the the perfect be the enemy of the very good.”

The bill would reduce the statewide gross receipts tax rate to about 3.1 percent, down from over 5 percent. With cities and counties having add-on rates, the statewide average for the tax would be 5.12 percent, Harper said. But those changes would not take effect for several more years, while some of the loopholes would be closed sooner.

Egolf said earlier Wednesday that the new measure would raise money to help with the fiscal year 2018 budget, but there was no financial analysis available on the bill in time for the floor vote, and House members didn’t inquire. In fact, a vote after 10 p.m. on the floor amendment and the final bill took less than 10 minutes.

With time running out in the 2017 legislative session, which adjourns March 18, lawmakers are hustling to take votes on multiple revenue proposals intended to close an expected $90 million operating deficit for the 2018 fiscal year budget and perhaps double cash reserves, which have fallen to below 2 percent.

The depletion of general fund cash reserves is one reason the state’s credit rating was downgraded by Moody’s Investors Services with a negative outlook. The rating change means higher borrowing costs for the state and school districts to finance construction projects.

Gov. Susana Martinez has promised to restore reserves to 5 percent of the $6.1 billion general fund, or $300 million. None of the proposals, including her own budget, brings cash to that level, but several measures together could get them to 4 percent, about $240 million.

Lawmakers hope that increasing cash and stabilizing the operating budget with more steady revenue from tax and fee hikes would be sufficient to avoid further credit downgrades.

Related: Amazon to begin charging tax on New Mexico-bound purchases

Another piece of the fiscal puzzle is House Bill 202, which is awaiting action in the Senate Finance Committee. The House version, which passed with solid Democratic support but none from Republicans, would raise $250 million with four changes: extending the gross receipts tax to all internet sales, increasing the permit fee for heavy trucks, closing gross receipts tax exemptions for health care providers that currently pay almost nothing and diverting $900,000 a year from the legislative retirement fund.

A companion bill also increases the fee to purchase a new or used motor vehicle to 4 percent of the purchase price, up from 3 percent.

The Senate is considering amendments that would change the mix of revenue and reduce some of the bill’s impacts on hospitals and the trucking industry.

But senators also want to add a gasoline tax increase to the omnibus bill, bringing the total revenue to $350 million, according to Sen. Carlos Cisneros, D-Questa, a member of the Senate Finance Committee.

Senate Minority Leader Stuart Ingle, R-Portales, was among the Republican senators who voted against a stand-alone increase in the state gas tax from 17 cents to 27 cents. He told lawmakers that he wanted to put forward a comprehensive revenue package that would close the spending gap and restore reserves.

Legislative leaders said they had a meeting with the governor Wednesday about budget priorities. Both House Speaker Brian Egolf, D-Santa Fe, and Rep. Nate Gentry, R-Albuquerque, the House minority leader, said it was productive, but they emphasized there is still no “deal.”

A spokesman for Gov. Martinez added, “We still have significant work to do.”

That uncertainty has led Democrats who hold the majority in both the House and Senate to move several measures forward so the governor can decide which ones to choose.

“She’s got plenty of choices. It gives her the ability to pick and choose from any of them,” Sen. Cisneros said.

A stand-alone gasoline tax that would raise about $130 million for the general fund, and lesser amounts for road and bridge maintenance, has passed the Senate and is moving forward in the House.

And the Senate on Wednesday passed a bill to increase the tax on a package of cigarettes and extend gross receipts tax to cigars and electronic cigarettes. Under an amendment to that bill, sponsored by Sen. Howie Morales, D- Silver City, the $89 million raised would go directly to public schools as part of the state’s per-pupil funding formula.

Harper’s bill was originally developed as a broad reset of what he called the state’s broken tax system. It included restoring the gross receipts tax on food as a way to broaden the tax base and lower the overall rate to under 3 percent. Harper, a software engineer, and other experts have spent thousands of hours running different scenarios on the changes in what he called, “my second Ph.D.”

The original bill also included changes in the way property is assessed to equalize the taxes paid on similar homes by eliminating a 3 percent cap on yearly valuation increases. But those measures were deal breakers for Egolf and other Democrats who said they would never bring a food tax bill to the full House.

Harper narrowed the measure to focus solely on the gross receipts tax, which has evolved over the decades into a confusing patchwork. He said the state’s GRT tax is one of the worst in the United States and, “it scares away businesses even thinking to locate in New Mexico.”

Other Republicans and business organizations, including the Greater Albuquerque Chamber of Commerce and the Association of Commerce and Industry, have struggled with reforming the tax code for years and see Harper’s bill as their best path forward.

Lawmakers think the measure has a better chance of becoming law with Gov. Martinez because it falls under the category of closing loopholes rather than a tax increase. But many industries where loopholes and tax credits are being lost will now be taking a closer look at the bill as it moves to the Senate, where Sen. John Arthur Smith, D- Deming, is a co-sponsor.

And they will be doing that in the light of day in front of committees that take public testimony.

Contact Bruce Krasnow at