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Tax reform overhaul sought

Copyright © 2018 Albuquerque Journal

Republican Rep. Jason Harper plans to renew his push this year to overhaul New Mexico’s gross receipts tax code – this time with a scaled-down package of bills designed to win bipartisan support, he said.

Much of the legislation will be built on ideas that have previously picked up Democratic votes – the removal of dozens of tax deductions that cost the state revenue, imposing the gross receipts tax on “remote sales” made over the internet and taxing nonprofit hospitals.

But the package will also address the most “egregious forms of pyramiding,” Harper said, or the taxation of business-to-business transactions, like when a shopkeeper hires an accounting firm to handle payroll.

And the state and local tax rates would fall, though how much is unclear, Harper said.

The package would end up being “revenue neutral” for state government. Its impact on local governments is unclear but it is intended to be revenue neutral there, as well, he said.

“We’d make several huge steps in the right direction,” Harper told the Journal on Wednesday.

The overhaul, however, still faces a tough political environment. The upcoming session is a short one – 30 days, largely focused on the budget – and comes during an election year.

It’s also the last regular session during the tenure of Republican Gov. Susana Martinez, who has clashed repeatedly with the Democratic majorities in the House and Senate.

Sen. John Arthur Smith, a Deming Democrat and chairman of the powerful Senate Finance Committee, said Harper’s ideas deserve serious study to ensure the state avoids unintended consequences.

He said he appreciates Harper’s sincere push to improve the tax system.

“I applaud his efforts,” Smith said. “I still think it’s a steep hill to climb during a 30-day session, but I think it’s a debate and discussion that needs to be continued.”

One potential problem, he said, is that the tax rate might not actually fall that much under Harper’s plan.

Removing tax deductions and imposing taxes on internet sales and nonprofit hospitals would raise revenue, of course, but removing pyramiding would cost the state money.

Harper said he’s confident his package of bills would give the state room to significantly reduce the tax rate. But the exact amount isn’t clear yet, he said.

Firm to study system

The Legislature has hired an international financial services firm to study New Mexico’s tax system and build a computer model aimed at helping analyze potential changes to the tax code. The study is expected to be done this month. But the session begins Jan. 16, and Harper said he was unsure whether it would be ready when the session opens.

House Speaker Brian Egolf, D-Santa Fe, said the new computer model should help lawmakers evaluate proposals likes Harper’s.

“I still believe reforming our tax code is a big necessity,” Egolf said, “and I was and will continue to be committed to doing it. It’s just a question of timing and how much can we get done in the 30-day session.”

Much of what Harper is proposing sounds similar to what Democrats pushed for last year, Egolf said, though he noted that intense negotiations failed to produce an agreement.

This year, he said, Democratic lawmakers are working on their own proposals for overhauling the tax code – with the possibility of imposing higher income tax rates on people who make more money and lesser rates on people who make less. The system doesn’t have much “progressivity” now, he said.

“I’m hearing a little bit of concern that if we’re going to do tax reform, that it needs to increase fairness on the personal income tax side,” Egolf said.

Martinez has steadfastly vetoed tax increases during her tenure, though she has left open the possibility of imposing new taxes if it’s part of an overall tax reform package that improves the business environment in New Mexico.

Source of tension

Overhauling the tax system has been an incredible source of tension between Martinez and legislative leaders.

Each side expresses support for revising the tax system, but with different approaches.

Martinez, for example, blasted one bill passed by lawmakers last year as a “false attempt at tax reform.”

Democrats in the Legislature have generally favored proposals that remove fewer tax deductions, phase in the changes more slowly and include tax increases aimed at boosting revenue to support the state budget.

More expansive proposals sponsored by Harper, some of which touched on property taxes and other pieces of the tax system, have failed to gain traction. Harper, at one point, proposed a massive bill that cleared the House but died in the Senate.

Critics said the Harper and Martinez approach was too much too fast – that a piece-by-piece strategy is more appropriate.

Now, Harper said, he is taking that advice. His ideas will be split into at least three bills:

– A scaled-down reform of the gross receipts tax, which would remove 70 to 80 gross receipts tax deductions, impose taxes on internet sales and nonprofit hospitals, address “pyramiding” and reduce the state and local tax rates.

The precise deductions to be removed haven’t been settled on yet, Harper said.

But the legislation would be modeled, in part, on House Bill 191 from last year’s regular session, a proposal that won bipartisan support in the Senate. That bill would have removed dozens of deductions, from college textbooks to space vehicle fuel and the back-to-school tax holiday.

– Cleaning up a loophole in the state’s compensating tax, making the rate equal to the state and local gross receipts tax rates. The compensating tax is imposed when someone buys, say, equipment in one state where it’s not taxed but uses the product in New Mexico. Currently, it costs New Mexicans less to buy products elsewhere, in some circumstances.

– Improving the system that grants tax breaks to businesses that buy products wholesale in order to resell them. Currently, a Non-Taxable Transaction Certificate is required to prove the transaction was nontaxable. The change would allow businesses to use other methods of proving the transactions are nontaxable in case they have lost their certificate or did not get one for some reason.

Altogether, the package would be far less expansive than what Harper and other Republicans have proposed before. But it would be a tremendous improvement over what’s in place now, he said.

“We’re really going to try to fix the most broken pieces of it,” Harper said.