NM tax revenue lags behind its economy
Number of exemptions likely responsible for difference, study says
SANTA FE — New Mexico’s revenue from gross receipts taxes isn’t keeping up with economic growth overall — likely a consequence of tax breaks that punch holes in the state’s tax base, according to a new study.
Combined with other factors, New Mexico may face “increasing difficulty” coming up with enough money to pay for government spending, the report said.
The conclusions were outlined Monday in a presentation to state lawmakers on the Revenue Stabilization and Tax Policy Committee — where Democrats and Republicans alike expressed renewed hope about reaching agreement on how to overhaul the state’s complex system of gross receipts, compensating and personal income taxes.
“We may very well have the perfect storm in the next legislative session,” said state Sen. Carlos Cisneros, a Questa Democrat and vice chairman of the committee.
A team from the global accounting firm Ernst & Young, with help from Georgia State University, submitted a 66-page report to legislators on Monday. The group also developed a computer model intended to help the Legis-
lature evaluate the financial impact of proposed changes to the tax code.
Cisneros and other lawmakers said the work may help push the tax debate forward next year. For one thing, the computer model is expected to make legislators more comfortable that the state can accurately forecast how changes to the tax code will affect revenue.
And the state’s budget picture has improved dramatically after years of cuts triggered by falling oil and gas prices, giving lawmakers a little more of a financial cushion to work with.
Nevertheless, simplifying New Mexico’s tax code has been debated for years, with no substantial agreement between Republican Gov. Susana Martinez and the Legislature, where Democrats have usually held majorities in both chambers.
A new governor will take office ahead of next year’s 60-day legislative session. Martinez cannot run this year because of term limits.
The tax study submitted Monday didn’t necessarily produce any surprising conclusions for lawmakers. But several officials said it contributed good data and a computer model to guide the future discussion.
“They had no hidden agenda in skewing the data one way or another,” Sen. William Sharer, a Farmington Republican who pushed for the $400,000 study, said in an interview.
The study found a disconnect between the performance of New Mexico’s economy and the revenue it derives from gross receipts taxes, which are levied the sales of goods and services.
A 1 percent increase, for example, in the state’s gross domestic product, or GDP, results in just a 0.61 percent increase in gross receipts tax revenue, the study said. The report examined data from 1998-2016.
The numerous exemptions built into New Mexico’s tax code almost certainly play a role in the difference, according to the study.
Generally speaking, the study’s authors said, a government should want its revenue to track the economy.
“If revenue from a tax system grows at a pace that is lower than that of the economic activity that it taxes, it is indicative of a less productive tax system,” the study said. “Weak revenue streams can force lawmakers to impose relatively high tax rates, causing taxpayers to engage in additional tax avoidance behavior, and can lead to additional loss of revenue from tax evasion.”
The report also said that the state’s effective tax rates look high, when compared to peer states. But the rates are lower than average once New Mexico’s generous system of tax credits is factored in.
In other words, a business that knows how to navigate the state’s tax system can get a competitive deal. A business that isn’t receiving incentives, however, may face a higher tax burden than it would in New Mexico’s peer states, according to the analysis.
Sharer said the results underscore the need to simplify New Mexico’s tax system to help small and big businesses alike. He and others say the state could reduce its gross receipts tax rate if it eliminates the tax deductions, credits and other breaks that fill the code.
Rep. Jason Harper, R-Rio Rancho, said he’s already talking with Cisneros and other Democrats about how to find common ground on tax legislation.
“This puts us in a much better place to be much more comfortable with tax reform,” he said.
The report also examined New Mexico’s revenue from personal income and gross receipts taxes and compared it to government spending.
“This disconnect between the growth of these two revenue sources and the growth of general expenditures indicates that the state government will have increasing difficultly funding current expenditures,” the study said.
Rep. Jim Trujillo, a Santa Fe Democrat and chairman of the tax policy committee, said he hopes to form a bipartisan working group of lawmakers who can tackle tax code revisions.
“I think there’s a good framework there,” he said of the tax study.