SANTA FE – Democratic legislative leaders say a broad rewrite of New Mexico’s tax code – a priority of Republican Gov. Susana Martinez – isn’t likely to pass in the coming 30-day session.
But substantial changes are still possible, they said, including removing some of the exemptions that riddle the gross receipts tax system and taking some steps to address the “pyramiding” problem that burdens business-to-business transactions.
Martinez and House Republicans, however, have pushed for more expansive changes they say would simplify the tax system, broaden the tax base and improve the business environment in New Mexico.
The governor – entering her last year in office – accused Democratic lawmakers on Wednesday of stalling on tax reform. She noted that Democrats refused to pass a tax-overhaul package backed by her administration earlier this year, arguing that a study of the tax system was necessary first.
“They need to study tax cuts,” Martinez told the Journal, “but they can pass a tax increase in two minutes – no study necessary.”
House Speaker Brian Egolf, D-Santa Fe, said the tax study – backed by a bipartisan group of legislative leaders – isn’t a delay tactic.
But he said a “stem-to-stern” rewrite of New Mexico’s tax code would be difficult to do in a 30-day session generally dedicated to the state budget. More realistic possibilities, Egolf said, are removing some exemptions in the gross receipts tax system, taking some steps to address pyramiding and closing certain loopholes to generate new revenue.
“I am absolutely committed to changing our tax code,” Egolf said in an interview. “That study is a sincere and real effort to create the tool so that we can properly evaluate the ideas on how to change it.”
Tax study underway
Democrats hold majorities in both chambers of the Legislature. The 30-day session that begins Jan. 16 is the last regular session of Martinez’s tenure.
Wednesday’s back-and-forth comes as a $400,000 study of New Mexico’s tax system is underway. The results are supposed to be ready sometime in December.
The work includes building a computer model that will allow legislators to see how state revenue would change if they make certain changes to the code.
For example, exempting business-to-business transactions from gross receipts taxes – known as pyramiding because taxes are imposed on each step in a larger transaction – would cost the state revenue.
But removing those taxes would help small businesses that have to hire outside accountants and other professionals, supporters say, and the idea is backed by Martinez.
Imposing gross receipts taxes on internet sales, by contrast, would increase revenue. Democrats have embraced that idea, arguing that it would ensure online retailers don’t have an advantage over local businesses.
There’s been intense debate over how much each change would cost or add to the state budget – a problem that lawmakers say they hope the computer model will solve.
It’s clear, nevertheless, that Democratic legislative leaders want to start with a bill that’s less expansive than the legislation Martinez has pushed for.
Senate Majority Leader Peter Wirth, D-Santa Fe, said an earlier proposal from this year – House Bill 191, passed by the Legislature but vetoed by Martinez – would be a good start.
That bill called for phasing out dozens of gross receipts tax deductions. Martinez, however, called it “a false attempt at tax reform.”
Egolf said a new proposal could be amended with “a few tweaks” to go a bit further than the previous bill, perhaps addressing pyramiding and closing more loopholes.
“If it’s broader than that,” he said, “I think it’s going to be hard.”
Wirth said New Mexico also needs to analyze the impact of any tax legislation passed at the federal level.
“Realistically,” Wirth said, “I do not believe an omnibus tax reform bill is possible in this 30-day session. We can, however, make progress that will have a positive impact on the overall problem.”
Rep. Jason Harper, a Rio Rancho Republican who has led GOP efforts to reshape the tax system, said he will push for a scaled-down version of what he’s proposed in the past, perhaps breaking his ideas into separate bills.
The outlook for the kind of broad changes he’d like to see is “pretty poor,” Harper said. “My feeling is, because this is now something the governor has publicly supported, (Democrats) don’t want to give the governor a win in her last session, which is disappointing.”
Harper said he’s hopeful the Legislature will pass at least some of his scaled-down ideas.
“We can’t go another year without making some changes to improve the (economic) climate here,” he said.
Martinez said it’s time for Democrats to embrace broad tax changes.
“First, they stall, and they ask for money for a study, and now they’re saying we can’t do it,” she said. “That is enormously disingenuous to the people of New Mexico.”