February 18, 2023

Gross receipts tax bill stumbles over first hurdle in committee

By Robert Nott, The Santa Fe New Mexican

A bill favored by Gov. Michelle Lujan Grisham that would cut the state’s gross receipts tax to benefit New Mexico’s small businesses has been sent back to the drawing board.

Members of the House Taxation and Revenue Committee unanimously voted to temporarily table House Bill 367, which would lower the state’s gross receipts tax rate an additional quarter-percent — from 5% to 4.625%  — and create a deduction for a range of services small businesses contract out to other vendors, such as accounting, legal and payroll work.

The bill, introduced by Rep. Jason Harper, R-Rio Rancho, was a priority for Lujan Grisham, who announced just a week ago her plan to reduce the gross receipts tax again this year.

Last year the state reduced it by ⅛-cent, though that decrease will not go into effect until July 1. 

Since the bill was introduced, municipalities have marshaled forces against it, though initial reactions had been initially muted. But on Friday, committee members suggested Harper refashion the bill in the face of opposition from some 20 representatives, lobbyists and mayors from a number of cities who showed up in force. 

Their impassioned pleas to stop the bill speaks to the complicated issue of finding ways to cut taxes to help businesses without hurting the communities in which the businesses operate. 

HB 367 would deliver “a huge blow” to the state’s largest city, said Sanjay Bhakta, chief financial officer for the city of Albuquerque. He estimated the city would take a $37 million hit — an amount he said was equivalent to the salaries of 350 police officers.

He wasn’t the only one to put the bill’s impact into human terms.

Hobbs mayor Sam Cobb told the committee members small towns will find themselves forced to cut services because of the financial punch the bill will deliver.

Those communities, he said, are becoming “the poster children of unexpected consequences of House Bill 367.”

He said he estimates Hobbs would lose somewhere between $750,000 and $1.4 million in gross receipts tax revenue — money the Southeastern New Mexico city needs to pay police officers and firefighters. 

J.D. Bullington, a lobbyist for the city of Santa Fe, said the city expects a financial impact of about $5 million if the bill becomes law. He said there is “no room for error” in terms of how the legislation will financially impact small communities.

The bill’s fiscal impact report estimates a total loss of $70 million for all the cities and counties in the state combined.

“This level of revenue loss would seriously undermine local revenue stability, affecting cities’ ability to provide essential city services, public safety, and employee wage increases, among other needs,” the report says. 

The initiative also could “negatively impact municipal debt service coverage ratios, in turn impacting municipal bond ratings,” the report says. 

Harper told committee members Albuquerque would probably be affected the most by the bill but said the impact on some smaller communities could be “zero.”

He said HB 367 will benefit small businesses that get taxed individually for every contract service they conduct in what is known as “pyramiding.” 

Those pyramiding gross receipts tax payouts compound over time and are incorporated into the final price of the product charged to the consumer. Small businesses are more likely to pay these extra taxes because they have to contract out services, unlike larger businesses, which may have those services in-house, Harper said. 

The bill would eliminate the need to pay gross receipts tax on contracted accounting, engineering, financial management, information technology, human resources and legal services, as well as temporary employment.

The response from the committee to the bill was tepid.

Some questioned the fiscal impact report’s impact estimates. Others suggested Harper keep working on the bill in interim legislative committees before next year’s legislative session. 

“Pyramiding can be very hard to estimate,” said Rep. Christine Chandler, D-Los Alamos.

Rep. Jim Townsend, R-Artesia, told Harper the feedback he got from opponents and his constituents was enough to make him realize the bill needs work.

“You got a trick up your sleeve?” he asked Harper, drawing laughter.

“There are several tricks up my sleeve,” Harper replied.

Harper accepted the decision to temporary table the bill to give him time to rework the proposal. After the hearing, he said in an interview all individual tax bills, including HB 367, likely will be tabled and compiled into an omnibus tax measure. 

Chandler said during the meeting any effort to put the gross receipts tax deduction legislation into a larger tax bill will be carefully vetted.