A comprehensive tax bill has been introduced in the New Mexico House of Representatives to make major changes to New Mexico’s tax code.
The tax code legislation is sponsored by state Representative Jim Trujillo, D-Santa Fe, the NM House Taxation Committee chairman.
HIGHLIGHTS OF TAX BILL
Following are the major highlights to the house bill:
1. The state’s top personal income tax rate would go from 4.9 percent to 6.5 percent. Under this change, new annual income brackets would be created starting with an increase to 5.2 percent for a single filer making $23,500.
2. The state gross receipts tax rate would be reduced from 5.125% to 4.625% , a 0.5% reduction. The gross receipts tax is considered a highly regressive tax an affects lower income people more so than any other group of taxpayers.
3. Not-for-profit hospital services would be taxed at the same rate as for-profit hospital services.
4. The state’s gasoline tax rate would jump from 17 cents a gallon to 27 cents a gallon. The income generated by this tax is used for highway repairs, paving and expansions.
5. The state’s vehicle excise tax would increase from 3% to 4.625%.
6. Online internet sales, such as AMAZON sales, would be taxed immediately by both the state and local governments.
7. The State hold-harmless subsidies for city and county governments would end in the 2022 budget year, a full seven years early. Lawmakers repealed the gross receipts tax on food and medicine in 2004, and the state currently pays a subsidy to city and county governments to offset the lost revenue. State Senator Carlos Cisneros, a Questa Democrat, is anticipated to introduce legislation that would reinstate the gross receipts on food.
HOLD HARMLESS FUNDING EXPLAINED
In 2004, the Legislature decided to remove gross receipts taxes from food and medicine resulting in a reduction in the amount of tax revenue raised.
Cities and counties are given a share of state gross receipts tax revenues so, to “hold harmless” local governments, the Legislature approved payments or subsidies to the counties to make up for the lost revenue to them.
In 2013, a last-minute tax deal between the Democratic Legislature and Republican Gov. Susana Martinez resulted in a plan to eliminate the hold-harmless payments in a phase-out with 6% or 7% cuts annually over 15 years.
To make up for the phase-out, cities and counties were granted authority, on their own and without approval by voters, to increase the gross receipts tax in their jurisdictions by up to three-eighths of 1% which translates to about 38 additional cents on a $100 purchase.
The new taxing authority given to cities and counties can exceed by millions the loss of hold-harmless payments.
INTENT OF 2019 TAX CODE CHANGES
All the proposed changes to the tax code will result in a change to the state’s base gross receipts tax rate and is projected to increase state and local revenue levels by an estimated $333 million by the 2022 budget year.
State Representative Jim Trujillo, D-Santa Fe, the House tax committee’s chairman and the tax code change sponsor, said the changes are intended to generate more revenue for the state so that teacher salary raises and other major priorities requiring a recurring revenue source can be paid for in the future.
A key Legislative committee voted unanimously to approve a proposal that would incrementally increase minimum salaries for public school teachers and principals.
The proposal calls for the starting salary for Level 1 teachers to rise from $36,000 annually to $45,000 by 2022.
It calls for Level 2 teacher increases from $44,000 to $55,000 by 2022. Level 3 teacher pay would go from $54,000 to $65,000 by 2022.
GROSS RECEIPTS TAX RATES VARY THROUGHOUT STATE
The state’s base gross receipts tax rate is 5.125%.
Cities and counties are granted taxing authority by the legislature.
Despite the states base rate being 5.125%, there are numerous varying tax rates in cities and counties throughout New Mexico because of gross receipts tax “local add on” such as the “hold harmless” taxation.
Some gross receipts tax rates surpass 8% in some cities, such as Las Cruces (8.3125%), Santa Fe (8.4375%), Clovis (8.1875%), Gallup (8.3125%), Portales (8.1875%).
Albuquerque’s tax rate is 7.850%, Artesia is 7.895%, Hobbs is 6.8125%, Alamogordo’s is 8% and Silver City is 8%
Taos Ski Valley has the highest gross receipts tax rate in the state at 9.25%.
In 2003, Democrat Governor Bill Richardson successfully advocated for the reduction of the state’s top personal income tax rate.
In 2013, Republican Governor Susana Martinez signed off on a tax package that cut the state’s corporate income tax rate.
The 2013 tax package authorized city and county governments to raise their local gross receipts tax rates in exchange for a gradual phaseout of the state subsidy to replace the food tax revenues lost.
Because of previous income and corporate tax deductions, the state has a tax base that has a tremendous reliance on the oil and gas industry.
The New Mexico oil and gas industry is a volatile revenue source for royalties to the state.
During the last 8 years, New Mexico oil and gas industry production faltered leading to significant revenue shortfalls.
The number of existing tax breaks have also made the state more reliant on money from oil and natural gas taxes and royalties.
New Mexico’s revenue increased in 2018 because of the dramatic spike in oil and gas production and as a result this year the New Mexico Legislature has at least $1.1 Billion and as much as $2 Billion in additional revenue.
NEW MEXICO’S 2019-2020 BUDGET PROPOSALS
Governor Michelle Lujan Grisham has submitted a proposed total budget for New Mexico of $7.1 billion.
The $7.1 billion budget increases state spending by $806 million.
You can review the entire 115 page “EXECUTIVE BUDGET RECOMMENDATION Fiscal Year 2020 July 1, 2019 – June 30, 2020” at the below link:
The $806 million increase is a 12.7% increase over current levels.
The additional $806 million in new spending comes from the dramatic increase in oil and gas revenues in southern New Mexico and the Permian basin drilling.
Under Governor Michelle Lujan Grisham’s proposed budget state spending will hit an all-time high.
The Lujan-Grisham 2019-2020 proposed budget includes increasing spending levels in the following areas:
Public schools: $3.2 billion, a 18% increase.
Higher education: $830.2 million, a 3.3% increase.
Medicaid: $1.01 billion a 6.7% increase.
Courts, district attorneys and public defenders: $306.3 million, a 3.5% increase.
Prisons: $321.4 million a 5.2 percent increase.
The overall spending increases included in Lujan Grisham’s budget are larger than the cumulative state spending growth during the 8 years that former Governor Susana Martinez was in office.
The biggest reason for the sharp contrast between the Republican Governor Martinez budgets and the Democrat Governor Lujan-Grisham budget is that New Mexico had two economic downturns during Martinez’s tenure that mandated spending cuts, reduced take-home pay for state employees and budget-balancing maneuvers.
On January 14, 2019, the New Mexico Legislative Finance Committee (LFC) released its own budget plan.
The budget plan would increase year-over-year state spending by $670.8 million, or by 10.6%, as opposed to the Governor’s $806 million, or 12.7% increase or a 2.1% difference between the plans.
The LFC’s budget would earmark more than three-fifths of the additional spending toward public schools statewide.
A budget compromise between the Governor’s proposed budget and the LFC’s the proposed budget will now be negotiated with the Legislature and the Governor’s Office for final enactment by the New Mexico legislature.
For more analysis and commentary, the Governor’s budget and the LFC budget see:
ANALYSIS AND COMMENTARY
Much of the increase in spending under consideration will require recurring revenue sources, especially for public education and teacher salaries, and therefore it is not at all surprising that the New Mexico Legislature is considering tax reform legislation and increasing taxes to some extent.
Both New Mexico Senate and House legislative leadership have said for some time there is a need to overhauling New Mexico’s tax code because of so many different tax rates.
During the last 8 years, former Republican Governor Susana Martinez resisted and opposed any and all tax increases, no matter the need or justification, to avoid any and all tax increases at all costs, the result which is a major decline in the delivery of essential government services.
Instead of supporting tax increases, Governor Susana Martinez was more concerned about following Republican dogma of “no tax increases” and “reducing the size of government” by ordering spending cuts, reduced take-home pay for state employees, budget-balancing maneuvers and a downsizing of state government.
There are some 3,000 positions that are vacant or that have been lost in state government with government employees required to do more work for the same pay to fill the void of lost personnel.
The proposed changes to the tax code without a doubt will be strongly opposed by numerous business organizations, chambers of commerce throughout the state, especially the Greater Albuquerque Chamber of Commerce, airline companies, health insurance providers, car dealers and gas production companies.
The Municipal League no doubt will weigh in and object to a few of the tax code changes.
House Republicans are already severely criticizing the Democrat proposed tax code changes saying “I told you so” and that this would happen with the election of Democrats saying the changes would raise taxes on small businesses and many state residents who cannot afford to pay any more taxes.
With the election of Democrat Governor Michelle Lujan Grisham, it makes it more likely than not that tax code changes will happen in one form or another during this legislative session and if not in the 2020 legislative session.
Governor Michelle Lujan Grisham has indicated she would consider supporting tax overhaul legislation but has said she would closely scrutinize the impact of any such legislation on New Mexico families and local governments.
Lujan Grisham’s own budget plan submitted to the legislature calls for several tax-related changes including tax collection on internet sales, imposing the state gross receipts tax on not-for-profit hospital services and imposing a state tax on electronic cigarettes.
Lujan-Grisham is also proposed reinstating an expired solar tax credit and expanding an existing tax break for working families.
If all the tax code charges suggested by the Governor were enacted, they would represent a net tax increase of $35 million in the coming year.
The biggest problem confronting Democrat Governor Michelle Lujan Grisham and the Democratic Controlled legislature is “overreaching”.
Calling for increasing taxes when the state is experiencing at least a $1.1 billion in additional revenues from the oil and gas production is going to be a very difficult sell.
Tax increases may be necessary because the $1.1 billion surplus is not the guaranteed continuing revenue flow source needed to support our public education system and the massive amount of education funding being called for by both the Governor and the New Mexico Legislature.