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Analysis: Tax overhaul would slash revenue

Copyright © 2017 Albuquerque Journal

SANTA FE – A new analysis of a proposal to reshape New Mexico’s tax code suggests the bill – as written – would have cost the state $30 million to $44 million in basic operating revenue next year.

But a few wording fixes could have brought the proposal much closer to breaking even, with just $3 million to $16 million in lost revenue, according to a new legislative report.

Both sets of estimates, however, assume the state would have been able to tap into a reserve fund to help shore up the budget – a move that requires either an emergency declaration of the governor or a two-thirds vote of the Legislature.

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The new analysis is outlined in a 27-page report prepared by economists working for the Legislative Finance Committee.

Some of the revenue problem, the economists said, was rooted in a technical error in the version of the bill introduced in last month’s special session. The mistake would have left nonprofit sales out of the tax base, contrary to the supporters’ intent, the report said.

The 430-page bill emerged as a major point of contention this year between Republican Gov. Susana Martinez and the Legislature, where Democrats hold majorities in both chambers. Martinez pushed repeatedly for lawmakers to overhaul the tax code to make it more business-friendly and easier to understand. Democrats pushed back, arguing that the complexity of the legislation required more study.

The proposal, House Bill 8, would have broadened the tax base by removing many exemptions that cost the state revenue.

But the proposal also sought to remove the worst parts of “pyramiding” – or business-to-business taxes that drive up the cost of goods and services for consumers – which would have reduced state revenue.

The goal overall was to develop a “revenue-neutral” proposal.

The proposal would have left untouched the tax exemption on food sales.

Rep. Jason Harper

House Bill 8 – sponsored by Rep. Jason Harper, R-Rio Rancho – was ultimately blocked in a House committee last month. A similar measure stalled in the Senate during the regular session earlier this year.

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Sen. John Arthur Smith, a Deming Democrat and vice chairman of the Legislative Finance Committee, said the analysis underscores the need to be careful when revising the tax code.

Unexpected loss of revenue “is precisely what we’re concerned about,” Smith said in an interview Monday. “When you undertake something of that magnitude, you better have additional revenue to back it up in case you’ve erred.”

A spokesman for the governor, Joseph Cueto, disputed the report’s accuracy and accused the LFC of bias.

“It’s no surprise that the Democrat-controlled LFC released a flawed analysis proving they’re against allowing hardworking New Mexicans to keep more of their own money,” Cueto said in a written statement. “Dishonesty and the status quo have always been easier than reforming our archaic tax system, but New Mexicans deserve better.”

The Legislative Finance Committee is made up of 17 state lawmakers – 10 Democrats and seven Republicans, reflecting the partisan makeup of the Legislature as a whole.

The economists and other staff members who work for the committee are charged with providing objective analysis. They work for the entire committee, not just Republicans or Democrats.

Harper wasn’t immediately available to comment because of work obligations.

Terri Cole, president and CEO of the Greater Albuquerque Chamber of Commerce, said the new LFC analysis is helpful. It’s more accurate and thorough than what was available immediately during the session, she said.

The chamber supports simplifying the tax code.

“There are many choices that must be made to ultimately lower GRT and business-to-business taxes,” Cole said in a written statement Monday. “Those choices must be made on good data and accurate information. This new work by the LFC will help the quality of the future debate.”

The analysis focuses on the version of House Bill 8 introduced in the May special session. A preliminary analysis of the bill was released during the session, but LFC economists Jon Clark and Dawn Iglesias continued examining the bill this month.

Supporters of the tax overhaul say the right adjustments to the tax system could produce new revenue in the coming budget year while remaining revenue neutral in the long term. The ultimate goal is to produce a simpler, more business-friendly tax code that reduces volatility in state revenue streams.

Harper’s bill also sought to lower New Mexico’s gross receipts tax rate – while producing the same amount of revenue – by eliminating many of the exemptions and deductions in the tax code.

The debate isn’t over. The Legislature approved plans for a study of New Mexico’s tax base, with the results expected in the fall.

The study’s findings will guide future legislation aimed at revamping the tax system.

The LFC analysis said the bill would have produced new money for road projects. The report estimates the bill would have funneled an extra $41 million next year into state and local road funds.

That money would have been earmarked for street projects, not the operation of basic state services.

The extra revenue, in any case, would have come from increasing the excise tax on motor vehicle sales, from 3 percent to 6 percent. A share of that revenue would also have been put toward lowering the overall gross receipts tax rate.

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