SANTA FE – While most tax-related measures ended up stuck in political quicksand during a New Mexico special session that ended this week, lawmakers did approve one change that could have a lasting impact – a “rainy day” fund that calls for certain revenue to be set aside in cash-flush years.
The new fund, modeled after similar funds in other energy-rich states, could put the state in a better position to weather future revenue downturns. Such dips have occurred regularly in recent decades.
“I didn’t call it reform, because ‘reform’ has a bad connotation around here,” Rep. Larry Larrañaga, R-Albuquerque, who has pushed for the legislation, said after the special session adjourned Tuesday. “But it is a reform in the budget process in a positive way.”
How will the new rainy day fund work?
Technically, it won’t really be a new fund at all, just an expanded use of an existing tax stabilization reserve fund, one of several state reserve funds. It calls for any annual revenue collected from oil and natural gas taxes that exceeds a five-year rolling average of such tax collections to go into the reserve fund, instead of the state’s general fund.
It won’t take effect until July 2018, meaning state officials will have a year to prepare.
Although the proposal was supported by Gov. Susana Martinez’s administration, it was included in a tax package put together by ranking House Democrats.
The two-term Republican governor ultimately line-item vetoed other parts of the bill – such as requiring online retailers to collect taxes from in-state consumers – but signed the rainy day fund provision into law.
In her message to lawmakers, Martinez said the rainy day fund will “protect state finances during periods of reduced state revenue” and added there would have been less of a need for spending cuts and other budget-balancing moves had it been in place in recent cash-lean years.
However, it will also likely mean less money to spend in any future years that feature robust oil and gas tax collections, as some of that money will be diverted into the rainy day fund.
Had the fund been in place over the past 10 years, a total of $627 million would have been set aside in four of those years for future use, according to a Department of Finance and Administration analysis.
Rep. Jim Trujillo, D-Santa Fe, the House Taxation and Revenue Committee chairman and a sponsor of the tax bill, described the policy change as a prudent step.
“Our problem has always been that we spend too much money, and oil and gas revenues can’t keep up,” Trujillo said Wednesday.
New Mexico entered the 2016 fiscal year with more than $613 million – or roughly 10 percent of state spending – available in various accounts generally described as reserves.
However, the state has all but depleted those reserves over the past two years due to lower-than-expected revenue collections. Plummeting oil and natural gas prices have been largely to blame, though recent tax cuts have also eroded the state’s tax base.