A comprehensive tax bill to make major changes to New Mexico’s tax code is moving forward in New Mexico House of Representatives with hearings being held in the House Taxation and Revenue Committee.
House Bill 6 (HB6), if approved by both the House and Senate, will overhaul New Mexico’s tax system.
Hearings on the bill are currently be conducted by the House Taxation and Revenue Committee, the likely last stop before moving to the House floor for a full vote of the House Chamber and then sent to the Senate.
The Bill as is will raise about $323 million a year for government operations and road projects.
According to a legislative analysis of HB 6, it will have the net effect of generating $286 million in new revenue for the state’s general fund with $37 million generated for state and local roads.
Albuquerque Democrat House Representative Javier Martínez, a co-sponsor of the bill, said the goal is to modernize New Mexico’s tax system and create a sustainable source of new funding for all public schools.
In defending HB 6, Representative Martinez had this to say:
“This is the first step of a process that’s going to take several years, I believe, to get there, but this is a very important first step. … For far too long, New Mexico has been way too dependent on the volatility of oil and gas. HB 6 broadens our tax base. It creates a sustainable revenue source for the state for years to come. We are looking at the wealthiest paying their fair share, we’re looking at income tax rates for the highest earners and bring them up to par . … Right now, the secretary and the doctor pay the same tax rate. That’s just inherently unfair.”
In a nutshell, HB 6 would:
1 Raise taxes on cigarettes sales.
2. Raise taxes on motor vehicle sales.
3. Reshape the personal income tax system so higher earners would pay more.
4. Impose taxes on all online retailers that sell to New Mexico residents.
DETAILED HIGHLIGHTS OF HOUSE BILL 6
The major highlights of the tax reform quoting an Albuquerque Journal report (link below) include:
“• Revise the tax systems for hospitals, with the goal of creating a level playing field for not-for-profit, government and for-profit hospitals. Not-for-profit hospitals currently are exempt from paying state taxes. It’s expected to raise $92 million in general fund revenue in the next fiscal year.”
“• Impose gross receipts taxes on sales made by online retailers to New Mexicans, including the imposition of the city and local parts of the tax. It’s expected to raise $42 million in general-fund revenue next fiscal year.”
“• Overhaul the state’s income tax brackets to make the system more “progressive” rather than flat. People would face a higher tax rate … as their income climbs [as follows]:
The top tax bracket for the highest earners … would climb from 4.9 percent now to 6.5 percent under the proposal. For a married couple filing jointly, the top tax bracket would kick in for families with income of $300,000 or more. It’s expected to raise about $132 million.”
“[This] proposal would partly undo a 2003 personal income tax cut that was pushed by then-Gov. Bill Richardson and delivered the largest reductions to high-income state residents.”
“• Double the “working families” tax credit allowed for low- and moderate-income workers. The credit is for people who are eligible for the federal earned income tax credit. Instead of being able to claim 10 percent of their federal credit, they could claim 20 percent. It’s expected to cost about $53 million in revenue.”
“• Establish an income tax deduction for taxpayers who have more than one dependent as part of an effort to offset an unintended state tax increase caused by the 2017 federal tax overhaul. It’s expected to cost about $48 million in revenue.”
“• Repeal parts of the capital gains deduction allowed for personal income taxes, which would raise about $62 million.”
“• Increase the excise tax on motor vehicle purchases from 3 percent to 4.2 percent, which would raise about $65 million. The money would largely go to the general fund, though some lawmakers broached the idea of changing the bill to send the revenue to the road fund instead.”
“• Raise taxes on tobacco and impose taxes on vaping products, which would generate $20 million for the state general fund.”
“• Change how corporate income taxes are calculated as a way to keep multistate corporations from “shifting” their income to another state to avoid New Mexico taxes. It would help some companies and hurt others, legislative analysts said, so the overall impact on state revenue is unclear, but likely positive.
Supporters said the proposal would help ensure the state could cover increased education spending in coming years, even if the oil boom doesn’t last.”
REFORMS NOT ADDRESSED BY HOUSE BILL 6
Three major reform areas not reported upon and ostensibly absent from House Bill 6 are:
1. Imposing the state’s gross receipts tax a food and medicine.
Gross receipts on food and medication was eliminated a number a years ago as way too regressive on low income and the poor.
However, the state lost millions in revenue as a result and the legislature failed to come up with as satisfactory revenue source to replace the lost revenues.
The elimination did impact the amount of gross receipts revenue to the cities and counties.
2. Hold harmless Provision:
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 former Republican Governor ““She-Who-Must-Not-Be-Named” 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.
3. Gross receipts taxing authority given to cities and counties.
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%).
There have been not reports of the legislature attempting to take away the taxing authority from the cities and counties.
GOVERNOR’S SUPPORT FOR THE MEASURE
HB 6 has drawn support from Democratic Governor Michelle Lujan Grisham’s administration.
Lujan Grisham’s own budget plan submitted to the legislature last month called 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, all of which appear to be in HB 6 in one form or another.
Lujan-Grisham also proposed reinstating an expired solar tax credit and expanding an existing tax break for working families.
Stephanie Schardin Clarke, the Secretary of the State Taxation and Revenue Department had this to say about HB 6:
“The bill goes a long way to diversify our revenue sources in a way that will provide stability to the general fund” said the Administration described it as a sensible way to stabilize government revenue and reduce New Mexico’s dependence on the oil and gas industry.”
THE USUAL SUSPECTS IN OPPOSITION
Not at all surprising, many in the private sector and within the Republican Party are voicing severe reservations saying HB 6 goes too far and does not make sense.
Business groups and energy companies make the usual arguments against HB 6:
1. It will damage the state economy
2. It will discourage investment in New Mexico and exacerbate the challenge of recruiting high wage earners to the state
3. The timing doesn’t make sense because of historical revenues being produced as a result of the oil and gas boom in the southeastern part of the state. State economists warn that oil and gas revenue are likely to fluctuate substantially in future years
Jack Bent of the very conservative and very Republican New Mexico Business Coalition told lawmakers: “It’s very concerning. … In talking with our neighbors and fellow taxpayers, how do we explain when we have a tax surplus that we’re going to actually raise taxes?”
Rio Rancho Republican Rep. Jason Harper, who wants tax reform without raising any taxes, said the bill’s provisions appear to raise income taxes on families, while other parts would give them a break, making it difficult to project what the net change would be.
Harper proclaimed that House Bill 6 is a tax increase bill, not a tax reform bill, when he said.
“In addition to the $323 million at the state level, there’s another $170 million that are going to cities and counties as part of this tax increase. You add that together, that’s half a billion dollar tax increase on New Mexico families, the biggest tax increase in the state’s history. … We have a billion dollar surplus now and a billion dollar surplus for next year, so two billion extra dollars and we’re talking about a half billion dollar tax increase. … That just blows my mind.”
Critics also argue that HB 6 fails to call for a reduction of New Mexico’s gross receipts tax rate which has always been a longtime goal of efforts to overhaul the state tax code.
GOVERNOR AND LEGISLATURES RESPONSE TO DISTRICT COURT RULING
Education is the number one priority for Democratic Governor Lujan Grisham and the legislature because of a District Court ruling that New Mexico was failing to meet its constitutional requirement to provide sufficient schooling to all students.
On July 20, 2018, Santa Fe District Court Judge Sarah Singleton, in a landmark case, ruled that the state of New Mexico is violating the constitutional rights of at-risk students by failing to provide them with a sufficient education mandating massive increases for public education.
The Governor’s proposed total budget for New Mexico is $7.1 billion.
The $7.1 billion budget increases state spending by $806 million.
More than 50% of the Governor’s proposed $806 million budget increase will go to the public education system.
Lujan Grisham’s budget plan calls for a more than a $500 million increase in public school spending.
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.
A detailed analysis of the Governor’s proposed budget can be viewed here:
If all the tax code changes suggested by the Governor were enacted, they would represent a net tax increase of $35 million in the coming year.
On January 14, 2019, the New Mexico Legislative Finance Committee (LFC) released its budget plan.
The LFC budget plan increases 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 earmarks more than three-fifths of the additional spending toward public schools statewide.
State prekindergarten programs would get about $25 million more under Lujan Grisham’s plan than under the LFC proposal.
ANALYSIS AND COMMENTARY
It is not at all surprising that the New Mexico Legislature is considering tax reform legislation and increasing taxes to some extent.
Much of the increase in spending under consideration by the New Mexico Legislature will require recurring revenue sources, especially for public education and teacher salaries.
Both New Mexico Senate and House legislative leadership have said for some time there is a need to overhauling New Mexico’s tax code.
During the last 8 years, former Republican Governor “She-Who-Must-Not-Be-Named” 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 former Republican Governor “She-Who-Must-Not-Be-Named” 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.
House Republicans are already severely criticizing the Democrat proposed tax code changes in essence saying “I told you so” and that this would happen with the election of Democrats controlling both the House and Senate.
With the election of Democrat Governor Michelle Lujan Grisham, it makes it more likely than not that tax code changes under HB 6 will be enacted with a few changes in the Senate and the Governor will sign it.
The biggest problem confronting Democrat Governor Michelle Lujan Grisham and the Democratic Controlled legislature is knocking down the argument that they are “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 a very difficult sell but may be necessary.
The $1.1 billion-dollar surplus at this point is a one-shot infusion, that once spent, it’s gone.
The $1.1 surplus probably would better used for major projects such as road and bridge repairs.
Governor Michelle Lujan Grisham in her inaugural address is that she wants the state to think big.
A major construction project that immediately comes to mind as “thinking big” is to use a good percentage of the onetime $1.1 Billion surplus to raze the aging and deteriorating 62-year-old Tingly Coliseum and build a state of the art 25,000 seat capacity arena on the fairgrounds.
For over a year and a half, the New Mexico State Fair commission has been working on a study to bring a 15,000- seat, state-of-the-art arena to the fairgrounds and the study will soon be released.
According to the State Fair Commission, Tingly Coliseum is not big enough and not modern enough to attract major concerts or events and to accommodate major national conventions.
Tingly Coliseum holds 11,000 people, it opened in 1957, and the facility is seriously inadequate to accommodate major venue events and concerts such as Justin Timberlake and Lady Gaga who by pass Albuquerque and go to Denver of Phoenix instead.
Albuquerque is one of the very few if not the only major city of its size that does not have such a venue.
Such a facility could be built with the City and the State entering into a joint power’s agreement for construction and management of the facility.
The bottom line is that 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 mandated by the state court ruling on the prior Republican Administration failures in our Public Education System over the last 8 years.
For more article on the state tax code and proposed budgets, see: