Legislature’s dilemma: Tax reform or more cuts?

David Abbey, left, director of the Legislative Finance Committee, and Senate Majority Leader Peter Wirth, D-Santa Fe, work on state budget numbers during a meeting of the LFC in Santa Fe on Friday. (Eddie Moore/Albuquerque Journal)

Copyright © 2017 Albuquerque Journal

SANTA FE – New Mexico lawmakers will head back to the state Capitol this week for a budget-balancing special session, and legislative Democrats and Republicans appear to agree on at least one point: They want it resolved fast and effectively.

But there’s little agreement on how much additional revenue – if any – will be needed to fund state government operations for the coming year, and whether an overhaul of the state’s clunky gross receipts tax system should be part of the special session mix.

Republican Gov. Susana Martinez called the special session after vetoing big chunks – including all proposed funding for legislative branch agencies and state colleges and universities – out of a budget bill approved in March by the Democratic-controlled Legislature and also axing a proposed $350 million package of tax and fee increases to help pay for it.

The two-term Republican governor has urged lawmakers to approve sweeping changes to the state’s gross receipts tax code in the special session, instead of standalone tax increases, while also restoring funding to the vetoed areas.

“There has been decades of complaining about these loopholes,” Martinez told reporters last week in Santa Fe. “We can study this to death, or we can actually have the courage to do something about it.”

However, most Democratic lawmakers – and some Republicans – have expressed wariness about fast-tracking the tax overhaul legislation, which stalled in the Senate during this year’s 60-day session due to concerns about its potential impact.

Some lawmakers have indicated support for a 90-day study of the state tax code, which would allow for more vetting of potential changes before the 2018 legislative session.

Sen. Carlos Cisneros, D-Questa, the vice chairman of the Senate Finance Committee, said the Legislature should focus on restoring the vetoed funding for higher education and legislative branch agencies.

“I think we need to fix the problems the vetoes got us into,” Cisneros told the Journal. “Essentially, that’s all we need to do.”

He said he thinks lawmakers should be able to wrap up their work in “a day or two or three, at best,” and said many lawmakers would prefer to hold off on the tax overhaul legislation.

“The last thing we want to do going into the special session is adopt a measure that’s going to disrupt state government,” Cisneros said.

But some House Republicans, who have resisted Democrats’ calls to override the governor’s budget vetoes, say a refusal to compromise could lead to more finger-pointing – and more vetoes.

“If you want to play chicken, I don’t think (the governor) is going to blink,” said Rep. Jimmie Hall, R-Albuquerque. “I don’t think the Democrats want to be the ones to shut state government down.”

Hall said he’s hopeful for a quick resolution to the special session, but said he’s bringing a week’s worth of clothes to Santa Fe just in case.

Higher ed anxiety

For colleges and universities, there’s millions of dollars at stake in the special session.

The governor’s veto struck down roughly $745 million in proposed state general fund dollars – and more in other state funds – for 17 institutions around the state, including the New Mexico Military Institute and the New Mexico School for the Deaf.

While Martinez has said she has a plan to restore funding, the vetoes have led to anxiety among university leaders, professors and students with just six weeks remaining until the start of the new budget year on July 1.

Marc Saavedra, the executive director of the New Mexico Council of University Presidents, said university officials are planning for a 1 percent spending reduction in the coming year – as was proposed in the original budget bill – but are hoping to avoid additional cuts.

“We feel pretty confident the governor and the Legislature are going to get this worked out as soon as possible,” Saavedra said.

He also said the longer the situation drags on without a funding bill being enacted, the more instability will build around New Mexico campuses.

Martinez met Friday with several top-ranking Democratic lawmakers and, after the meeting, a spokesman said the governor is confident there will be an agreement on funding measures, including for higher education.

Senate Majority Leader Peter Wirth, D-Santa Fe, sounded a similar tone after emerging from the closed-door discussion.

“I left the meeting with the sense that we’re going to get the higher education funding restored and that we’re close,” Wirth said in an interview. “That really is the number one priority.”

Partisan tensions

The special session will begin roughly two months after the 60-day regular session ended with Martinez – who has stuck to a “no tax increase” stance since taking office in 2011 – chastising lawmakers for relying on tax hikes to balance the state’s $6.1 billion budget.

Since then, a group of top legislators filed a court challenge over the governor’s line-item vetoes of all proposed funding – roughly $779 million in all – for legislative agencies and colleges and universities, arguing Martinez had overstepped her authority.

However, the state Supreme Court earlier this month rejected the challenge, saying it was too early to weigh in on the matter.

There’s also been a back-and-forth exchange of volleys between the Governor’s Office and top-ranking Democratic lawmakers, with Martinez staffers derisively referring to legislative leaders as “Santa Fe trial lawyers” and key legislators accusing the governor of being fiscally irresponsible.

The politically charged atmosphere could make finding common ground on tax code changes a tricky proposition.

Rep. Jason Harper, R-Rio Rancho, the architect of the tax legislation, has said that eliminating more than a hundred gross receipts tax breaks and lowering the base rate could help get New Mexico out of an “economic death spiral.”

His special session legislation has not yet been unveiled, but is expected to be pared back from the previous version, with built in “trigger points” that would allow some revenue-generating provisions – such as a reduction of the current tax exemption for nonprofit hospitals – to take effect before the rest of the bill.

But it’s unclear if the retooled bill can win enough support in the Legislature to make it to the governor’s desk.

“We shouldn’t be worried about legacies; we should be worried about passing good policy,” Sen. Clemente Sanchez, D-Grants, said in a recent interview.

Tax reform or more spending cuts?

The special session will play out against a backdrop of a sluggish economy.

New Mexico already had its top bond rating downgraded last fall, and credit rating agencies will likely keep a close eye on the special session’s outcome to determine whether additional adjustments are necessary.

After two consecutive years of budget cuts prompted by a steep revenue downturn, top Democrats say any additional spending reductions could do lasting damage to agencies and programs in a state that’s had the nation’s highest jobless rate for three straight months.

“We’ve cut and we’ve cut – I think there’s a bipartisan recognition now that more cuts aren’t the solution,” Wirth said.

But Martinez has said increasing taxes on New Mexico families and small businesses given the current economic climate would be just as misguided and has pointed to the recent defeat of a soda tax levy in Santa Fe as evidence of voters’ feelings.

“We’re working on overall tax reform,” the governor told reporters last week. “I want to see a budget pass, but I (also) want to lower the gross receipts tax.”

She has also advocated for shoring up the state reserves, by earmarking unspent infrastructure funds and taking money from legislators’ retirement account – though some claim that move would be unconstitutional.

Journal Capitol Bureau reporter Dan McKay contributed to this report.

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