What should tax reform look like?
One of Gov. Susana Martinez’s pointed criticisms of the recent legislative session was that it failed to enact tax reform. She has dangled the need for such action as something that a special session will have to address if she is to sign any balanced budget proposal.
There are several fallacies in the governor’s position. First, legislators actually did pass a tax-reform measure, House Bill 191, initially introduced by Republican Rep. Larry Larrañaga, R-Albuquerque, and amended in Senate Finance to include several pieces taken from the broader bill, House Bill 412, sponsored by another Republican, Rep. Jason Harper of Rio Rancho.
There was a very good reason for resisting HB 412 in the Senate. While the principle (broaden the gross receipts tax base and lower the rate) makes sense, the complexity of Rep. Harper’s bill, which attempts to end almost all exemptions to the gross receipts tax, made it a 333-page Goliath of dense, arcane tax verbiage. When it reached the Senate in the last week of the session, it proved literally impossible for our staff experts to score. We couldn’t tell if it would increase revenues or decrease them — or by how much.
So instead of ramming it through, our Finance Committee chose the far more reasonable alternative of pulling out a few pieces that could be scored and including them in Larrañaga’s less-ambitious tax-reform measure. But the Legislature has been twice burned in recent years by supposed “tax reforms” billed as “revenue neutral” or to even as a stimulus producing additional tax revenue.
When former New Mexico Gov. Bill Richardson eliminated in stages all state personal income tax brackets above $26,000, legislators were assured this would spark an enormous boom in wealthy people choosing to move here and in wealthy New Mexicans investing in businesses here. Neither happened, and we effectively wiped out $100 million a year in revenues that used to help finance state programs.
Then, when Gov. Martinez sprang a last-minute corporate income tax “reform” on us four years ago, we were again confidently assured by her tax gurus that this would be an economic engine resulting in greater business activity, hence greater state revenue. Once more it was a mirage — and the true cost of that “reform” is at least another $100 million annually — lost revenue with nothing to show for it.
So talk of tax reform makes me very nervous. I agree our tax system has become seriously deformed, but insufficient attention is given to what the previous tax cuts have produced: an imbalanced, twisted tax system, one overly dependent on the gross receipts tax (which has grown following each of the other “reform” attempts). There is a fairer and far more predictable tax source that we need to return to: the income tax — the way to end our regressive revenue picture; the way to stop squeezing a higher percentage of their money from the poor and working class than the wealthy pay.
No true tax reform can be discussed that does not also include an effort at reintroducing upper tax brackets to New Mexico’s structure. These could be fairly broad. Since all taxpayers pay the same rate now for everything over $26,000 in income, adding three additional 1 percent brackets (at say, $126,000, $226,000 and $326,000) ought to be considered.
In fact, we could consider tying additional income tax brackets to Harper’s gross receipts tax reform. They could be used as triggers: Should gross receipts tax revenue under Harper’s bill drop, we could add income tax brackets and use the resulting revenue to make up the difference.
Tax reform is legislative sausagemaking at its most extreme. We shouldn’t rush into any more mistakes, no matter how irritated careful deliberation makes the governor feel.