On October 28, 2020, the Albuquerque Journal published an article entitled “New Mexico tax breaks cost $1 Billion in annual revenue”. According to the Journal article, budget and financial analysts say in a report to the Legislative Finance Committee that “New Mexico forgoes about $1 billion in annual revenue through more than 100 tax breaks despite having little information about how effective many of them are. … The single most expensive “tax expenditure” … is the roughly $250 million a year it costs to provide a gross receipts tax deduction on food and to reimburse local governments for much of the lost revenue, according to the analysis released”.
The 2019 New Mexico legislature enacted legislation that more than doubled New Mexico’s annual spending cap on film rebates from $50 million to $110 million. It is estimated “the state will pay out roughly $83 million in film incentives this fiscal year but just $45 million next year – because of the interruption caused by the COVID-19 pandemic and the lag in paying out credits. The payouts are expected to fluctuate between $111 million and $115 million in the three years after that. Direct spending by the film industry is expected to range from roughly $408 million this year to over $530 million in future years. … the film industry provides strong wages – exceeding $56,000 a year on average, or more than $10,000 higher than the average for private industry in New Mexico.”
The link to the full Albuquerque Journal article is here:
JOHN B. STRONG
John B. Strong has lived in New Mexico since 1997. He is a highly successful private business owner and has been investing in business startups since 2004. He is a co-founder or board member at several different companies, mostly in technology, healthcare, and financial services. Mr. Strong describes himself as being “obsessed” with entrepreneurship and small businesses. Below is a guest column submitted by Mr. Strong for publication on this blog.
DISCLAIMER: The opinions expressed in this guest column written by John Strong are those of Mr. Strong and do not necessarily reflect those of the www.petedinelli.com blog. Mr. Strong has not been paid any compensation to publish the guest column and has given his consent to publish on www.PeteDinelli.com
GUEST COLUMN: Taking A Hard Look At Tax Incentive Programs In New Mexico
“After reading … [the] Albuquerque Journal article on tax incentives and credits in New Mexico, that are costing one billion dollars per year, I thought it was time to take a deeper dive into them. The issue is if we are really getting the maximum benefit from these incentives compared to the cost. Almost every state and most cities use some types of tax incentives and credits to further economic development. There’s nothing new about that. The issue, is which tax incentives and credits provide the biggest return on the investment we as taxpayers make in them., and that is where things get a little murky.
The largest portion of these credits or incentives are so that we can have no gross receipts tax on food purchases, something that actually benefits all New Mexicans. The next biggest piece is for the film industry, and that is where we need to take a closer look at what we are getting in return. We can do better.
FILM INDUSTRY CREDITS
The Journal article references the amount we are expected to spend on the film industry credits at between $111 Million and $115 Million each year over the next 3 years. To date there has been some $400 million dollars on these credits thus far with “credit” meaning a cash rebate to the industry. New Mexico’ Economic Development Department estimates are that each job created from this program has cost the state $39,000. That’s a lot of money for every job. But more importantly there are real questions about how many of those jobs are actually based in New Mexico.
Many times, the technical staff and actors that we rebate their wages are actually not even residents and simply leave at the end of filming and go back to their home states and the production companies do the same along with our money. Its fair to ask if this is actually a good deal for us? There is no question that the film industry is important and that we want it to grow, prosper, and expand here. But at what cost? Especially when we weigh the costs against other areas that we can spend economic incentive dollars.
Recently, I was in Tulsa, OK and picked up the Tulsa World newspaper to see an article about them raising their tax rebate incentive for the film industry from 25% to 30 % in order to better compete with other states. That makes me wonder just where will this end? Are we in a race to see which states can give away the most money? What happens when we try to wean these companies off these incentives? Will they just pull up stakes and leave? These are of course valid questions.
Obviously, we have done a good job in attracting both Netflix and NBC Universal into making substantial investments in production here, and that’s a very good thing, but aren’t these incentives meant to help establish an industry here, and hopefully once they are well on the way to success to gradually reduce these incentives so that we can move on and focus on another industry? I agree that it is glamorous to have such a large film industry presence here, but there are also areas that we can spend some of this money, that although are not as glamorous and exciting, are arguably many times more productive. In some ways, I believe we are star struck by this industry and not looking at it clearly with the real economic benefits as a guidepost.
SOFTWARE DEVELOPMENT, PROGRAMERS AND DATA SCIENTIST BOOTCAMPS
One area that I have argued repeatedly that we should spend some money on “Boot Camps” for software developers and programmers and data scientists. If you are unfamiliar with Boot Camps, they are immersive, intensive training programs for about 12 weeks or so lasting a full time, 40 hours per week plus. When you exit them you are certified as a software programmer and developer or data scientist.
These Boot Camps are an increasingly important part of the technology ecosystem and are professional occupations that are in very high demand. The Bureau of Labor Statistics says these are the 5th fastest growing professional jobs in the country, and we will be needing in excess of 300,000 of them at a minimum in the next 10 years. Extrapolated for population New Mexico should be getting over 6,000 of these jobs, but we can get many more if we make the commitment. Here’s how.
In the San Francisco, Los Angeles ,Boston, and Washington DC areas, software developers can expect starting salaries of approximately $100,000 per year and Data Scientists more than $200,000 per year. In New Mexico the average starting salaries for these positions are $50,000 and $95,000. This is creating a large demand for outsourcing from Western States and the Boston/Washington DC areas to less expensive regions, and New Mexico is one of the least expensive. The 3 main local boot camps are already fielding requests from companies out of state for outsourcing, and that can increase dramatically.
We get an incredible return on the investment in boot camps, but don’t spend nearly enough money on them. The demand for software programmers and data science graduates in boot camps is off the charts, and we need them more than ever. We also need technical grads from certificate programs for the film industry in fields such as film and video editing.
What will we get in return? Let’s do some math. The placement rate for graduates in these Boot Camps is in excess of 85% in the first 6 months. The average starting salary for a Software developer/programmer or full stack developer is $50,000 per year and increasing to around $60-$70,000 from there. For a Data Scientist it is $95,000 rising to over $110,000 after a year or two. In addition to that for each Data Scientist that we create , they will need the support of as many 5-software developer/programmers. Both of these occupations have unemployment rates of less than 2%. Even better, creating a professional technology job comes with a job multiplier in excess of 4. That’s 4 additional jobs for every one we create.
Contrast that with manufacturing jobs that have an average multiplier of 1.4 and an even bigger bonus here is that the 4 additional jobs created from tech are heavily weighted to professions such as lawyers, accountants and CPA’s, marketing specialists, and engineers. In manufacturing the multiplier jobs skew towards retail and restaurant occupations. We are also giving ourselves something else here that we desperately need: employment opportunities for other professionals who are exiting our University System.
LACK OF JOB OPPORTUNITIES
Currently, there is a real lack of job opportunities for theses graduates, and they are leaving for states like Colorado, Arizona, Texas, and California. Keeping them here has to be a top priority for our state. A growing technology ecosystem will help provide the opportunities to keep these University graduates here. If we graduate over 4-5 years 250 Data Scientists and 1,000 software programmers/developers the job multiplier will add an additional 5000 jobs. So now we have an impact of 6,250 jobs. Most all of them professional jobs at that. If we paid the entire cost of each qualified applicant to one of these camps, say $15,000 for and example, it would be less than $19,000,000, or less than $3500 per job. And that’s if we paid for everything with no reimbursements at all. Contrast that with the cost of each film industry job at $39,000. But even better than that, once these workers are in the job market, they are self-sufficient productive taxpayers for a lifetime. What can be better than that?
You may be asking why the state would need to get involved here? The reason is that these programs do not currently qualify for traditional student loans and funding. There are some grants available from foundations and companies, but it is not nearly enough. We have to also consider the social benefits we can get here as well. We are taking people who are largely working in retail, call center, and restaurant occupations paying $10-$12 per hour and converting them into professional job holders earning $50,000 plus. That is very meaningful when you take a person who is currently able to afford an apartment with roommates, and put them in a short time in a position to actually own their own home and raise a family. The benefits there are clear, in reductions in all of the ills that come with low income and poverty. We know that this leads to reduced levels of crime, addiction, physical abuse, and mental illness. How do you even place a value on that?
ANGEL TAX CREDIT
Another area that we can and should take a hard look at is the New Mexico Angel Tax Credit. This is a tax credit of 25% off your state income tax in return for investments you make in qualified New Mexico companies which are generally startup companies. This tax credit has been a critical component of funding for startups by local investors, something that we did not have enough of here. This program gives a qualified investor in a qualified company a 25% credit on their New Mexico State income tax due for investments in New Mexico companies. In a state that has a deficit of Angel investors for its startup ecosystem , this is an important component and incentive.
The Angel Tax Credit program had previously been administered by the Department of Economic Development, where one person was in charge of the program. It was at that time relatively straight forward and simple. This year, the program was moved to Tax and Revenue Department. I have personally raised over $2 million dollars for local startups over the last year and this program was one of the keystone incentives for investors. Unfortunately, the program was moved from Economic Development to Tax and Revenue this year.
Why does that matter? First, economic development looks at you as someone who is making an investment in a local business, and that’s a god thing. Tax and Revenue? They only see a taxpayer and they want to know how they can extract money from that taxpayer. Last year, under EDD you would simply get a certificate for your investment and then attach it to your tax return. Pretty simple and straight forward. Now that it is in Tax and Revenue? The first thing they ask you for is to sign a form agreeing in advance to allow them to audit your tax returns, both federal and state, for three years in advance. Who do you think is going to agree to that? It makes the program basically useless and it should simply be cancelled and the resources spent somewhere more productive. This is an administrative problem that can be fixed, but will it? So far it is not.
THE BOTTOM LINE
What’s the bottom line here? We are spending a billion dollars each year on tax incentives and credits. I have no problem with that at all. I do have a problem with where we spend this money. Yes, it is glamorous to have such a large film industry presence here, but it would be really exciting to me to see call center and retail workers graduate from boot camps and become homeowners and productive taxpayers too. And I would really like to see Angel investors get that same 25% rebate on the cash investments they make into New Mexico startups too. This is not about the money we spend on these programs, it’s about who we spend it on. It’s also about who will benefit the most from it. Hopefully with this next 60 day session of our legislature that will convene in January 2021 we will address a few of these items.”
Links to other guest columns written by John Strong are here: