Will tax reform hurt or help New Mexico?

Rep. Steve Pearce

Copyright © 2017 Albuquerque Journal

WASHINGTON – Republicans in the House and Senate are racing to overhaul the U.S. tax code by Christmas, but congressional Democrats from New Mexico are trying to pump the brakes, warning that the GOP plans would hurt the state.

The New Mexico delegation’s only Republican, Rep. Steve Pearce, disagrees, contending that middle-class income tax cuts and small-business breaks in the House and Senate bills would spur investment and create jobs.

Meanwhile, White House Budget Director Mick Mulvaney told the Journal that President Donald Trump is eager to see a tax reform bill on his desk by year’s end – before political opponents can derail the effort.

“I do worry about the role that special interests play,” Mulvaney said in an interview with a small group of reporters at the White House this month. “There is a great power to inertia in Washington, D.C. There (are) a lot of people with a lot of money sort of vested in keeping things the exact same way as they are.”

Pearce voted for tax reform legislation that passed the House on Nov. 14, while Democratic Reps. Michelle Lujan Grisham and Ben Ray Luján voted against it.

The Senate plans to take up its own version of the legislation this week. Sens. Tom Udall and Martin Heinrich of New Mexico – both Democrats – have said they will vote against the Senate bill in its current form.

The House and Senate bills contain significant differences, but both aim to restructure the tax code for businesses and individuals.

Both the House-passed plan and the pending Senate bill, which cleared the Senate Finance Committee this month on a party-line vote, would cut the 35 percent corporate tax rate to 20 percent while reducing personal rates for many taxpayers. Both plans would nearly double the standard tax deduction for most taxpayers while erasing or shrinking many deductions.

The Senate’s proposed income tax cuts for individuals would expire at the end of 2025, while those in the House plan would be permanent.

Projected federal deficits would grow by about $1.5 trillion over 10 years under the plans.

David Abbey, director of the New Mexico Legislative Finance Committee, said the additional debt is an important consideration for states such as New Mexico, which rely heavily on federal spending.

“It leaves less money for other priorities,” Abbey said.

Richard Anklam, executive director of the New Mexico Tax Research Institute, said at least half of all New Mexicans wouldn’t be directly affected by the tax bracket changes because they don’t make enough to pay federal income taxes.

“Anything you do with income taxes is not going to impact at least 50 percent of our population, because you can’t cut taxes for someone that’s not paying taxes,” Anklam said. “Benefits (from the tax bills) tend to increase – like tax liability – with income. The more you make, the more you pay, and the more you benefit in absolute terms financially.”

Representatives of New Mexico’s small businesses, the oil and gas industry and the Greater Albuquerque Chamber of Commerce said tax breaks for business would stimulate the state’s sluggish economy, which could eventually help boost incomes.

“The only answer to our nation’s challenges is in economic growth and not in making draconian cuts to entitlements or to the military,” said Terri Cole, president of the Greater Albuquerque Chamber of Commerce. “So, a growth strategy is the only answer and that is why the corporate tax and simplification pieces in the Senate bill are so important.”

Tax deductions or tax hikes?

Both chambers’ tax packages would nearly double the standard income tax deduction to around $12,000 for individuals and about $24,000 for married couples, as well as raise the current $1,000-per-child tax credit.

New Mexico’s median family income in 2016 was $48,451 – the fifth-lowest in the nation, according to the Henry J. Kaiser Family Foundation.

Estimates by the bipartisan congressional Joint Committee on Taxation say the Senate plan would mean higher taxes beginning in 2021 for many families earning under $30,000 a year. By 2027, families making less than $75,000 would see tax hikes, while those making more would pay less in taxes.

Heinrich and Udall said that while they support some elements of the Senate plan, such as simplifying the tax code and increasing the child tax credit, they oppose the overall bill. The lawmakers said the legislation is disproportionately weighted toward helping wealthy Americans and Wall Street while saddling the middle class with $1.5 trillion in debt.

The Republican bills keep the earned-income tax credit, popular with the working class, but do not expand it.

“I’m not opposed to a more competitive corporate tax system, but not one financed on the backs of middle-class families,” Heinrich, the ranking member of the congressional Joint Economic Committee, told the Journal.

“The GOP plan takes away family tax deductions and exemptions and uses that money to cut corporate rates. I think they ought to find savings within the corporate tax code in order to finance corporate rate reduction, instead of their current plan that raises taxes on working families to do it.”

Among the deductions the House Republican plan would eliminate is a $250 tax credit for teachers who pay for classroom supplies out of their own pockets. In New Mexico, 23,390 educators claimed the deduction last year. Proponents of the plan, including Pearce, say the doubling of the standard deduction would more than offset the itemized deductions for most filers.

Meanwhile, the House bill is also sparking concerns among higher education advocates, because it would count as taxable income certain tuition benefits that are currently exempt. That includes the tuition waivers graduate students earn for working as researchers or teaching assistants at colleges and universities; nearly 145,000 students nationwide get that kind of benefit, according to the American Council on Education.

It would also tax the tuition waivers that universities offer as benefits to their employees or family members. The Senate bill would keep those exemptions.

Approximately 5,000 students at the University of New Mexico are on tuition waivers, according to officials. That includes about 1,260 employees and family members who qualify for tuition remission.

“The benefit for UNM is improving the educational attainment of our staff and supporting dependent pursuit of higher education, which is a recruitment tool for attracting faculty and staff,” Terry Babbitt, UNM’s vice provost for enrollment and analytics, said in an email. “If taxing the educational benefit deters anyone from pursuing additional education, then it is a shortsighted remedy that will hurt UNM and the entire state in the long run.”

Big money or small businesses?

Udall said he’s not surprised that Wall Street and many wealthier Americans back the bills, but he said those interests have a scarce presence in New Mexico.

“If you’re a high net-worth individual, a multinational corporation, or a private equity or hedge fund, you love this bill,” Udall said of the Senate legislation. “Overall, the analyses I’ve seen predict that New Mexico will see very little of the overall benefits because our state is home to very few high net-worth individuals, multinational corporations, or private equity or hedge funds.”

But New Mexico is home to a lot of small businesses. Minda McGonagle, state director for the National Federation of Independent Business, said tax relief provided to businesses in both the House and Senate bills is “very, very important.”

The Senate proposal contains a 17.4 percent deduction for so-called “pass-through” businesses for married taxpayers with taxable income up to $500,000 and $250,000 for individuals.

“That is going to help a lot of small businesses,” McGonagle said. “In New Mexico, given our small-business dominance, we need to be provided tax relief – as corporations are – so we can get about the business of job creation and expansion.

“In New Mexico, you hear policymakers repeatedly talk about how small business is our state’s economic engine. Well, retaining income is our fuel. That’s what we use to invest in our businesses.”

Robert McEntyre, spokesman for the New Mexico Oil and Gas Association, a critical contributor to the state’s economy, said the tax plans, especially the House bill, would be a boon for the industry.

“Pro-growth elements in the House version, like corporate tax rate reform and cost recovery, will only help New Mexico continue to build on the $13 billion in new oil and gas investments we’ve seen over the last year, ultimately driving more critical funding to our schools and state budget,” he said.

Democrats vs. Republicans

Still, Rep. Lujan Grisham contends that House Republicans weren’t interested in Democratic input and that the bill would mean a net loss for the state.

“The congresswoman firmly believes that the American people deserve a bipartisan tax reform effort that incorporates the best ideas from both parties, and stands ready to work with Republicans on some of her own bills, including streamlining tax benefits for home businesses,” said her spokesman, Gilbert Gallegos.

“So far, House Republicans drafted their bill behind closed doors and passed it through the House in a partisan manner without any opportunity for amendment or improvement in order to truly focus tax reform on middle-class families and job-creating small businesses.”

Rep. Luján said the House bill “dismantles the state and local tax deduction – a change that will hit every middle-class family – especially those living paycheck to paycheck.”

Pearce – the delegation’s lone Republican and a former small-business man – argues that the overall structure of the House bill would help the state’s struggling economy. He cited a provision allowing for a 100 percent write-off on new equipment costs for businesses.

“In all business, the real difficulty is paying your taxes and buying new equipment,” Pearce said. “It’s hard to do the two together. This is going to give a shot in the arm to all manufacturers, and small businesses will be able to become a little more stable and weather the storm. Small businesses are just trying to stay afloat in New Mexico, so that is going to be very impactful.”

Journal staff writer Jessica Dyer contributed to this report.

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