New Mexico legislators are seeking to overhaul a key part of the state’s tax code in next year’s legislative session, but doing so will be difficult.
That’s according to members of the New Mexico Legislature’s interim Revenue Stabilization and Tax Policy Committee after they heard a presentation from state experts on tax reform efforts and an update on an independent study on tax reform in the state.
Legislators have been looking at reforming the state’s Gross Receipts Tax, a key source of revenue.
Earlier this year, the state hired Ernst & Young, in partnership with Georgia State University, to take a look at how changing the state’s GRT might affect revenue.
Legislative Finance Committee analyst Jon Clark said analysts will examine a tax reform effort sponsored during this year’s special legislative session by Rep. Jason Harper, R-Rio Rancho.
Harper took a crack at tax reform when he introduced House Bill 8, a massive 400-page bill which would have lowered the gross receipts tax while eliminating most deductions. The bill failed to pass its first committee, whose members had less than a day to review it.
Clark and other experts detailed the provisions of that tax reform effort as well as another effort by Sen. William Sharer, R-Albuquerque. These bills will be the focus of the study and the likely building blocks of future tax reform efforts.
Clark said Harper’s bill was the first successful attempt “of even creating a ballpark estimate” of the fiscal impact of a major tax reform proposal.
Analyzing tax breaks
A day after the hearing, legislators received another jolt of why tax reform is necessary—and difficult.
New Mexico State Auditor Tim Keller released a report that tallied nearly $1 billion in tax breaks in the state. This is separate from, and more extensive than, the state’s Taxation and Revenue Department’s (TRD) annual tax expenditure report.
The report outlined the lost revenue from carveouts in the state’s tax system, which Keller said amounted in nearly $1 billion in lost revenue last year.
“Bringing transparency to the return on investment is key to making informed tax policy choices that help our state,” Keller said in announcing the study.
While a state senator, Keller was among those who sought to mandate an annual comprehensive tax expenditure report showing the impact of tax deductions and expenditures on the state’s budget. While the bills passed the Legislature with overwhelming margins, Governors Bill Richardson and Susana Martinez each vetoed the efforts.
Keller’s office worked with TRD, which he described as “reluctantly helpful” to compile the report. The information in the Auditor’s report was not always the the most fresh. Some of the information dated back to 2009 and 2011, the most recently-available information.
Keller described the report as the most comprehensive tax expenditure budget ever produced by the government while acknowledging that it is not very comprehensive.
Still, they were able to determine the broad impact of some tax breaks by adding together various tax breaks and exemptions. The oil and gas industry, for example, was the largest beneficiary of tax programs, at nearly $400 million. This came from 83 different programs. Keller said many of these were described as anti-pyramiding components or offsetting other payments the oil and gas companies paid that companies in other industries were not subject to.
Friday morning, the committee heard about the 2016 TRD tax expenditure report, which has been criticized in the past for not being comprehensive, along with the newly-released analysis from the Auditor’s office.
Committee members praised the most-recent TRD report for being more detailed than those in the past. But it still didn’t include everything that legislators wished.
Senate Majority Leader Peter Wirth said the bills passed by the Legislature and vetoed by the governor would have included legislative economists along with those from the executive branch and required the economic development department to join the effort, to examine job impacts of the tax breaks. These did not take place in the TRD analysis, which came after an executive order by Gov. Susana Martinez in 2011.
“I just think that we should look once again at putting this in statute,” Wirth said.
Caution on tax breaks
Senate Finance Committee Chairman John Arthur Smith, D-Deming, said it was fascinating to listen to the discussion between the experts and committee members.
He then cautioned that tax reform would not be what some expected.
“The area that bothers me the most is the remark that, and I think it’s absolutely right, when people hear the buzzword tax reform, they think they’re going to get relief,” Smith said. “They’re not going to get relief. We’re just going to shift it to someone else because there’s a base number that we absolutely have to have in some form or fashion.”
Much of the discussion focused on Harper’s bill, aspects of which will likely be rolled into a new bill in next year’s legislative session. Last year, Gov. Susana Martinez supported the bill.
House Labor and Economic Development Committee chairman Bill McCamley, D-Mesilla Park, said having enough time to understand the bill was important.
“Please give people the time necessary to fully vet everything that comes in,” McCamley said.
Clark agreed that legislators need time to understand the issues.
“There’s no perfect way to do tax reform,” Clark said. “It ends up being just a matter of how you weigh different choices.” Those choices can include addressing anti-pyramiding, essentially the taxing of a product each step through the manufacturing process, versus taxing the health care industry. Or, for example, considering a lower GRT rate versus additional anti-pyramiding.
Clark said more states study tax reform than actually follow through with it.
State Taxation and Revenue Department Chief Economist Elisa Walker-Moran outlined one of the risks for a state that recently overhauled its tax code. North Carolina, she said, had to adjust its changes after personal income tax cuts led to plummeting revenues. The state drastically lowered its personal income tax rate and then delayed the effective dates of those cuts by a year, as part of a package that also had deep cuts to the corporate income tax rate.
Harper said legislators shouldn’t be afraid to act.
“We live with risk all the time right now. Our current tax code is rife with risk,” he said. “What we need to do is what risk we can guard against, what risk we can control and the risk we can’t control, don’t let it paralyze us into inaction.”
Harper said he may split next year’s bill into four smaller pieces: renaming the state’s GRT a sales tax, the “actual reform,” , a fix for Nontaxable Transaction Certificates, which are used to prove deductions during a tax audit, and cleanup language of TK.
While GRT revenue makes up a large portion of the state’s revenues, those aren’t the only taxes levied by the state.
Individuals pay personal income taxes (PIT) and corporations are subject to corporate income taxes (CIT).
Like with GRT, these taxes engender debate over the level of taxation and deductions. And there is little evidence on either side for their claims of what will happen with their proposed changes.
Unlike with GRT an analysis of personal and corporate income taxes would be difficult. That’s because of laws governing the protection of personal information. States cannot share confidential tax data with a third party, making it so Ernst & Young may not be able to get all the information needed to properly analyzed the taxes or the effects of changes to the taxes.
Just stripping identifying information from CIT information likely would not be adequate, Clark said. Since there are so few large taxpayers in New Mexico, even just the raw data would allow someone to figure out the identity—and so tax information—of the entities.
Sanchez had a possible solution: Eliminating the corporate income tax entirely, saying it was such a small part of the state’s revenues anyway.
“If we can leverage that to bring more economic development… that’s business,” he said.
Sharer agreed, saying it should “go away.”
“That’s one of those things that would attract folks,” Sharer said.