Need Seen for Overhaul of N.M. Tax System

There is a growing consensus in state government that New Mexico’s tax system is long overdue for a major overhaul to produce a system that levies taxes more simply on a broader base at lower marginal rates.

Just don’t expect too much too soon, some key state senators said Wednesday at the New Mexico Tax Research Institute Legislative Outlook Conference.

Some truly innovative tax reforms, such as replacing most state taxes with a small consumption tax, require more political courage than most legislators have and could take a decade to enact, said state Sen. William H. Payne, R-Albuquerque.

“We’ve had no tax policy,” said Sen. John Arthur Smith, D-Deming. “We’ve had tax deals. There is no long-term plan.”

The Legislature’s interim tax policy committee heard proposals to revamp corporate income taxation, including the Martinez administration’s bid to lower tax rates and change the basis on which taxes are calculated to favor companies that sell much of their production out of state. The committee endorsed none of them, said Pam Ray of the Legislative Council Service staff.

“The Legislature tries to make things revenue-neutral at this point,” Ray said. “It’s difficult to get agreement, not so much on lower rates – that agreement might be fairly easy. The problem is how we make up the revenue we lost when we lower these rates.”

New Mexico’s complicated corporate tax code features some of the highest tax rates in the region, which it lowers for favored businesses through $1 billion in exemptions, deductions and credits, collectively known as tax expenditures. It isn’t clear if any of them creates enough jobs to be worth the cost, said Sen. Tim Keller, D-Albuquerque. Eliminating half of those expenditures would raise enough revenue to allow a 2 percentage-point cut in gross receipts taxes, he said.

“We have huge winners and losers in New Mexico” determined by who can “scramble to get the exemptions and deductions” that lower their tax bills, said Sen. Peter Wirth, D-Santa Fe. Ending some of those breaks would broaden the tax base and lower rates for everyone, but that will be “extremely difficult to do” because “each of those exemptions has been fought for by whatever lobbyist fought for it.”

The interim tax committee did not endorse measures to repeal several tax expenditures, including the high-wage jobs and rural jobs credits, Ray said. “These are very popular credits,” she said. “It’s going to be a difficult pill to swallow to get rid of those.”

Payne is “not optimistic we’re going to see a lot of major changes in anything.” There are too many new legislators joining the body this January who have to get up to speed on the issues, he said. With the 2016 gubernatorial election campaign beginning, legislators and the administration will ask if a proposal “is not only good policy, is it good politics?”

Changing taxes can yield unexpected and expensive consequences, Smith said. Repealing gross receipts taxes on food cost the state $30 million more in lost revenue than anticipated. Exempting some inputs to manufacturing from GRT reduced revenue twice as much as forecast, he said.
— This article appeared on page C2 of the Albuquerque Journal