SANTA FE – Gov. Susana Martinez has made it clear that overhauling the state tax code is a key to breaking the impasse over New Mexico’s budget crisis, in her view.
And lawmakers on both sides of the aisle say they share her goal of simplifying the tax system.
But is now, amid a historic budget crunch, the right time to reshape New Mexico’s tax laws?
That’s a question at the heart of debate as lawmakers prepare to head back to Santa Fe for a special session next week.
Three approaches are emerging:
• Act now: The Martinez administration is working with Rep. Jason Harper, R-Rio Rancho, on a tax overhaul bill that could be approved as soon as next week, in the special session that begins May 24.
And now is absolutely the right time, they say, because the legislation could phase out a host of tax breaks next year, raising revenue to help cover state spending in the short term. In the long run, however, the goal is to make the proposal “revenue neutral” by lowering the overall gross receipts tax rate.
• Act slowly: The Democratic majorities in both chambers – joined by some Senate Republicans – have favored a more cautious approach. They’ve backed legislation that would phase in changes over a number of years, providing plenty of time for advocates to make their case to save one tax break or another.
This approach, they say, would help avoid unintended consequences and minimize the danger of disrupting state revenue when there’s so little margin for error, given the state’s tight budget and sluggish economy.
• Split the difference: Republican Sen. William Sharer of Farmington will ask his colleagues next week to support a 90-day study of the tax system, with the goal of enacting broad changes to the tax code this fall.
A study, he said, would give lawmakers some numbers to work with as they debate changes to the tax code and how an overhaul might affect revenue.
But it would take the pressure off having to do it all next week. Instead, Sharer suggested, a special session could be held in October to focus on tax changes.
“I am convinced that now is the time for tax reform,” he said in an interview. But “we’re still working without all of the data. That scares a lot of people.”
Harper, who has led Martinez-backed efforts to revise the tax code, said he likes the idea of a study. But there’s already enough information to overhaul the state’s complex system of gross receipts taxes, he said.
“I worry that if we don’t take the first step now and wait for another study,” Harper said, “it’ll never happen.”
Funding up in the air
The debate over taxes comes as the Republican governor and the Legislature – where Democrats hold majorities in both chambers – remain at odds over a spending plan for the fiscal year that begins July 1.
The Legislature earlier this year passed a $6.1 billion budget that relied on about $350 million in tax and fee increases to help cover the spending.
Martinez vetoed the tax package and the funding for higher education and the Legislature itself – a temporary move, she said, while a new spending plan is negotiated.
If funding is restored for higher education and the Legislature next week, there will be a gap of roughly $70 million to $150 million between spending and revenue. How to raise revenue to cover the potential shortfall – through tax increases or a broader reform package – is a focus of debate.
House Republicans announced their plan Tuesday for the budget – largely matching what Martinez has outlined in her own proposals.
Like the governor, they propose restoring funding for higher education and the Legislature, while adding in extra funding for the University of New Mexico Cancer Center and for financial aid for college students.
It would rely on raising revenue through Harper’s tax overhaul, in addition to taking money from a legislative retirement fund and other budget changes.
“New Mexicans want this situation resolved quickly to remove the cloud of uncertainty hanging over the state’s budget,” Rep. Larry Larrañaga, R-Albuquerque, said in a written statement. “This plan meets everyone’s goals without harming New Mexico’s families with unnecessary tax increases.”
Rep. Patricia Lundstrom, a Gallup Democrat and chairwoman of the House Appropriations and Finance Committee, said that at least one component of the Republican plan may not be legal – taking money out of the retirement system.
And she said there are probably better places to increase funding, such as the Children, Youth and Families Department.
“We’ve got other agencies literally begging for relief,” Lundstrom said.
In any case, she said, she remains hopeful a budget agreement can be reached.
Food tax contentious
A key question in reshaping the tax system is whether to reimpose the gross receipts tax on food purchases.
Harper favors that idea, and Martinez says she’s open to it. They say there are ways to erase the burden on low-income people who qualify for food stamps – by exempting them from the food tax, for example.
But many Democrats say they won’t support it. Opponents have blasted the idea as a “tortilla tax.”
Harper wasn’t ready to say whether his proposal will include the food tax.
“We’ve run the numbers on every scenario you can think of,” he said.
Some Democrats, meanwhile, are embracing Sharer’s proposal for a 90-day study.
Senate Majority Leader Peter Wirth, D-Santa Fe, said a comprehensive study of the tax base is picking up bipartisan support.
“It will give us the baseline information we need to enact broad-based tax reform in a responsible way,” he said.
Staff economists for the Legislature have warned lawmakers that it’s difficult to predict how certain tax changes would affect state revenue.
Harper and Martinez say the time to act is now. The Legislature already has the information it needs, they contend.
“Now is not the time to spend even more taxpayer dollars on kicking the can down the road with another study for government bureaucrats to file away in a desk somewhere,” Martinez spokesman Michael Lonergan said this week.