Pared-down tax proposal could still be controversial

Some legislators say reform backed by gov. is too much to tackle in special session

A Republican state representative who is leading an effort to reform New Mexico’s tax structure is scaling back the scope of a bill that failed in the last legislative session in hopes of making it more palatable to Democrats in next week’s special session.

“We’ve listened to the concerns people have raised,” said Rep. Jason Harper of Rio Rancho. “We’re working real hard to get a bill people would have confidence in and not feel it’s too risky or we’re going too fast.”

Even in its pared-down form, the bill is sure to be a flashpoint in the ongoing budget battle between Democrats and Republican Gov. Susana Martinez, who supports the measure and is urging the Legislature to make tax reform a centerpiece of any fiscal package. Democratic leaders say there is no appetite to tackle the complex measure in the special session, which starts May 24, just before Memorial Day weekend.

“You can’t do this on the fly in a special session that costs $50,000 a day,” Speaker of the House Brian Egolf said Wednesday.

Egolf wants a more measured process and supports funding a comprehensive study of the options for reforming gross receipts taxes, then moving ahead with changes next January. Legislators will begin a regular 30-day session then.

Harper’s 300-plus page bill was introduced halfway through this year’s regular 60-day session that ended in March. It included proposals not just to simplify gross receipts tax policy, but to restructure the personal and corporate incomes tax and change aspects of the way the state assesses property. The initial version also included an option to bring back a tax on grocery purchases, though lawmakers removed that section before the first committee vote.

That bill was amended further before it passed the House or Representatives to address only the gross receipts tax, which lawmakers say is confusing. A tax of 5.1 percent is imposed by the state on gross sales at both the wholesale and retail level, and cities and counties can add on their own rates.

Gross receipts taxes range from a low of 5.5 percent in Lea and Hidalgo counties to a high of 8.6 percent in parts of Taos County.

That version of the bill sought to eliminate some 100 tax credits, exemptions and deductions in return for lowering the statewide tax rate to about 3 percent.

Even the thinned-down bill hit obstacles in the Senate, where it died in its first committee. One four-hour public hearing saw opposition from a dozen industry groups, nonprofits, health-care providers, railroads, a uranium processor, broadcast stations and farm and dairy owners, all interests that benefit from existing tax exemptions.

The proposed reforms take aim at reducing the tax burden on some business-to-business purchases, what’s known as tax pyramiding. It affects a restaurant that pays tax on beef and then sells hamburgers, or on smaller professional firms that need to contract for outside services as legal work or accounting expertise.

But the estimated cost to the state for eliminating all pyramiding could be $300 million to $700 million, according to the Legislative Finance Committee. Because the state has already cut funding for higher education and other programs, many lawmakers are reluctant to do anything that could worsen the fiscal balance sheet. Gross receipts taxes account for one-third of all general fund revenue.

For that reason, Harper said, his new effort will focus on one aspect of pyramiding: professional services.

That includes only areas where there is specific financial data, including information technology, human resources, engineering, legal and temporary services. The cost of removing these transactions from the tax base is now estimated at $115 million to $215 million, according to economists with the Legislative Finance Committee.

Removing these taxes would be important for many businesses that are too small to hire their own technicians or lawyers, but obtain services on a contract basis.

“This is the pyramiding that is the worst. It will level the playing field,” Harper said.

He said his bill draft is almost completed and will be circulated before the start of the special session.

His bill, he said, now retains exemptions for the agricultural industry, and it reconfigures some of the taxing on nonprofit organizations so they are not negatively affected as much by the changes.

Another big objection during the regular session was raised by Sen. Clemente Sanchez, D-Grants. The original bill did not specify what the new tax rate would be. Instead, it was to gather financial data on the impact of closing all the gross receipts tax loopholes. Once known, state economists would establish a new, lower rate based on a formula.

Harper said the new bill allows lawmakers to do those calculations and set a rate themselves. If, as expected, groceries or nonprofits remain tax-exempt, then the rate would be higher.

Harper initially hoped to lower the state rate below 4 percent. But political reality is that it won’t drop as much if many of the sacred cows remain tax-exempt.

He admitted the bill is not as far along as he had hoped, but the effort involves merging elements of three separate bills — two that were passed and vetoed and one that died.

Unfortunately, he said, the bill has been caught in the crossfire between Gov. Martinez and Democrats in the Senate. The governor said there has been enough study of New Mexico’s tax structure and it’s time to vote on the bill.

Democratic lawmakers say the special session needs to focus on restoring funding for colleges and universities and the legislative branch of government. Martinez vetoed all funding for them.

Egolf said he expects the House to take action on balancing the budget within 24 hours, then recess to await action from the governor.

Harper, though, said when he talks with Democrats privately they are more supportive about tackling his reform bill. “I’ve worked really hard to make this a bipartisan effort,” he said.

Sanchez, chairman of the Senate Corporations and Transportation Committee, said the bill is moving in the right direction to address the concerns raised by lawmakers and the public. But, like Egolf, he does not think it can be considered next week.

“I just don’t think we have the time in a special session. Both parties are saying that. It’s not just the Democrats, it’s the Republicans in the Senate, too.”