Study says taxes in N.M. need more equity

A new study is recommending a menu of options for New Mexico lawmakers to consider as part of a larger effort to stabilize and improve the state’s tax structure and reduce its reliance on a single industry or revenue source.

For the average New Mexican, it could mean paying more money at the gas pump.

For more affluent residents, it could mean a higher personal income tax rate structure or losing the capital gains personal income tax deduction.

The 141-page report by the PFM Group of Philadelphia, presented Tuesday to the legislative Revenue Stabilization and Tax Policy Committee, makes more than a dozen policy recommendations.

If enacted, the recommendations would make New Mexico’s tax structure more balanced, more diversified and “perhaps deal with some of the boom-and-bust situations that it has found itself in on a fairly frequent basis because of the concentration of the oil and gas industry in the state,” said Randall Bauer, lead author of the report, in an interview before the committee hearing.

Rep. Javier Martínez (D-Albuquerque), said the new study, coupled with a similar report the Legislature commissioned a few years ago, adds to the “growing the body of work that we will be able to use in order to chip away at this tax system of ours.”

“It’s one of the few things that we can agree across party lines is that the entire system needs an overhaul,” said Martínez, the committee chairman.

Revamping taxes

Reinstituting a personal income tax rate structure with higher marginal rates at higher income levels is among the recommendations.

“New Mexico was one of several states that experimented with lowering top rates in the last 20 years to help attract high income households and stimulate economic development,” the report says. “However, there is little evidence from New Mexico or other states that this strategy was successful.

Restoring top tax rates would make the overall structure more equitable while raising needed revenue.”

Other recommendations include eliminating the capital gains tax deduction, which benefits mostly higher-income earners, and reinstituting an estate tax, which is paid by wealthy individuals, most of whom also have been high earners.

The report, commissioned by the Rockefeller Family Fund, also recommends the state establish a structure for taxing recreational marijuana. While New Mexico has yet to legalize recreational marijuana, national trends and efforts during recent legislative sessions suggest legalization is afoot, the report says.

“Many states that are now legalizing marijuana are doing so because of its revenue potential – a recognition that its use via the black market is prevalent, and the state would benefit from regulating and taxing it,” according to the report, which says tax collections in the range of $50 per capita for New Mexico would raise about $100 million annually.

A recommendation to increase New Mexico’s gas tax rate, currently among the lowest in the country, generated concern from Sen. Clemente Sanchez (D-Grants), who said he once carried a bill to increase it by a few cents.

“The ones that will pay more should that go up are the people that live in the rural areas of the state, because we don’t drive, you know, around the block to go to the grocery store,” he said. “We have to drive a long ways just to purchase a gallon of milk or a loaf of bread.”

Taxing food

Food, not just gas, could also cost more.

The study recommends broadening the gross receipts tax base to again include food. But it also recommends the state enact an income tax credit for lower income taxpayers.

“While the GRT deduction for groceries seems logical from a tax equity standpoint, the exemption applies to all taxpayers – higher income earners purchasing filet mignon get the same benefit as lower income households buying hamburger, and higher income households get the largest share of the benefit,” the report states.

While high-income people benefit the most, low-income individuals “feel more impact on themselves because they tend to spend more of their income on food,” said Bauer, director of PFM Budget Management and Consulting Group’s state government practice.

“But we’re not talking about taxing their food. Ultimately, we’re talking about moving that exemption to the personal income tax as a refundable credit,” he said. “They don’t owe any income tax. They get a check from the state for that amount.”

Among the biggest takeaways from the report is that New Mexico’s tax structure has gotten “a little bit unbalanced,” Bauer said.

“In most states, the two largest revenue sources are a broad-based consumption tax, which in your case is the gross receipts tax, and personal or individual income tax,” he said. “The difference in New Mexico is you have a very broadbased consumption tax, and that tax tends to be more regressive than personal income tax, and your personal income tax has kind of been hollowed out a bit. There has been significant rate compression at the top end of the personal income tax.”

The tax issues date back to former Gov. Bill Richardson’s administration, Bauer said, “and it really hasn’t given you the bounce back that most states have gotten.”

Compared to other states, New Mexico raises an above-average share of its revenue from gross receipts tax and a below-average share from personal income tax, the report states.

Expanding revenue

The study suggests New Mexico could lower the gross receipts tax by relying on other revenue streams. The gross receipts tax is considered regressive because lower income households spend a far greater share of their income on taxable goods and services than wealthier people.

Rep. James Strickler (R-Farmington), said New Mexico’s property tax rate needs to be part of the discussion.

“There might be some ideas there to help offset the gross

receipts tax,” he said. “We’re losing a lot of services in our area. Small companies are using CPA firms out of state so they don’t have to pay the 8.25 percent gross receipts tax, so yeah, we’re kind of in a pickle.”

Senate Majority Leader Peter Wirth (D-Santa Fe) said New Mexico has narrowed its gross receipts tax base and raised rates to a point where it’s hurting the most needy. But reversing course “feels to me like it’s harder and harder” to do without a fundamental shift, he said.

“I think restructuring some things can really help people, but here’s my dilemma: A one-quarter percent change in the GRT takes about $160 million,” he said. “If we’re going to look at a tax package, it needs to be a tax reform package that might raise some rates and eliminate some exemptions and deductions on one side but then also lowers rates on the other.”

Bauer acknowledged it’s difficult to make significant reductions when dealing with big bases.

“That’s why we did talk about some substitution amongst the taxes, between the property tax and the GRT,” he said. “That’s why we looked at what is one of your larger

exemptions and ways that you use a rifle shot instead of shotgun to get the benefit of people that need it the most.”

The report found New Mexico faces various challenges in the years ahead based on a review of key economic and demographic indicators. For example, the percentage of New Mexico residents living in poverty and deep poverty - defined as living in a household with a total cash income below 50 percent of the poverty threshold - is the highest among peer states, including Oklahoma and Arizona.

“While New Mexico has strengths to build upon (significant amounts of federal land and federal presence at locations such as the national laboratories, as well as the state’s scenic beauty and temperate climate), the state has significant headwinds as well,” the report says. “Issues related to lackluster population growth and educational attainment, coupled with high poverty, will be difficult factors for the state to overcome.”