Economist: Higher tax revenue giving state a boost

Increasing oil prices, more consumer spending good news for ailing budget

Led by the retail, construction and energy sectors, New Mexico is seeing more consumer spending and the highest tax revenues in three years, a leading economist said Monday.

“For the first time in quite a while, I’m coming before you with great news on the revenue front,” Jon Clark, chief economist for the Legislative Finance Committee, told state lawmakers. “It really feels like we’ve come out of the bottom and we’re tracking up.”

His positive outlook comes after two difficult budget years where the state operated day-to-day services with an unconstitutional deficit.

Falling tax revenue led the state to tap into its general fund reserves, and those fell from a high of $700 million to almost zero. Moody’s Investors Service then cut the state bond rating from the highest tier to a notch below that.

One reason for the state’s distress was falling crude oil prices. They fell from $106 a barrel in late 2013 to $30 in February 2016. Today, the price has stabilized in the middle $50s. That has led to more drilling and hiring by companies working the oil fields, especially in the Permian Basin in southeastern New Mexico.

Clark called some of the uptick “a whiplash from a rebound in the oil and gas industry.” He said that has rippled through the construction sector as well as professional and business services.

The state in August forecast a reserve cushion between 4 percent and 5 percent when the books were officially closed on fiscal year 2017. But on Monday Clark said a better-than-expected June and some accounting revisions by the Taxation and Revenue Department will boost reserves to about 8 percent, or some $480 million of the $6 billion general fund budget.

Clark said the first three months of fiscal year 2018, which started July 1, are also showing surprising strength. Gross receipts taxes, the largest source of state tax revenue, came in at $62 mil-

lion above 2017, or an increase of about 14 percent. In fact just about every revenue source paid into the state is coming in higher than in fiscal years 2016 and 2017, Clark said.

“If this tracking we’re seeing holds true to the end of the year, then we’d end fiscal year ‘18 with 8 percent reserves as well,” he said.

That’s good news for lawmakers and Gov. Susana Martinez. They will hear an official forecast next month, and that consensus estimate will be used to set spending levels for the next state budget when the Legislature convenes for a 30-day session starting Jan. 16.

But no one expects lawmakers to go on a spending spree. Martinez, entering her final year in office, hopes to use the legislative session to try to reform the state’s complex tax code. Any extra dollars would be used as a buffer against those changes.

For lawmakers, getting back to a reserve level of at least 10 percent is a priority. That would be the minimum needed for the state to ride out another mild recession, according to a recent analysis. Getting through a severe recession would take a reserve buffer of 17 percent.

Another level of uncertainty for the state is what happens in Washington with federal tax reform. So far, one measure has passed the U.S. House of Representatives and a separate bill is heading toward a vote in the Senate.

The details of the Senate bill are still fluid and nothing is certain as far passage. But one analyst told lawmakers that the bill in its current form could very well benefit the state general fund with more individuals in New Mexico paying tax on more dollars, even though they may be earning the same amount of money.

Richard Anklam, of the New Mexico Tax Research Institute, said New Mexico is a state where the personal and corporate income taxes reported to the state Taxation and Revenue Department are the same as that on federal returns.

One tax change now offered by Republican leaders in the Congress would eliminate many of the individual deductions — such as property taxes, mortgage interest, gifts to charity, or medical costs — and then double the standard exemption amount granted on federal returns.

Fewer deductions would mean a higher base income for state taxes, unless lawmakers make adjustments for 2018, the year when federal changes could become law.

“Most people will be affected by a small reduction in their federal taxes and an increase at the state level,” Anklam told lawmakers.

State Rep. Carl Trujillo, D-Santa Fe, said it would be unfortunate if families in the state saw lower federal taxes but then had to pay more income tax to the state. He said the Legislature should look at paying a rebate or adjusting its tax policy so this doesn’t happen.

Rep. Jason Harper, R-Rio Rancho, agreed. “Families are going to be shouldering it, as we just now head out of the recession I don’t think we want to do that,” he said.

But other lawmakers said New Mexico has not been very accurate in guessing about tax implications. They want to wait for hard data on federal deductions before making adjustments, then issue rebates after the fact.