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State income tax to go up for some families

Copyright © 2019 Albuquerque Journal

SANTA FE – Many New Mexicans – especially large families with children – can expect a bit more pain when they file their state tax returns this year.

State economists are projecting about $55 million in new tax revenue this year because of the federal tax overhaul. The 2017 law reduced federal tax rates but also had the effect of broadening the base of what’s taxed.

Unlike some states, however, New Mexico didn’t make corresponding adjustments to offset the federal changes.

“Lots of working people are about to be hit hard, and they don’t even realize it,” Rep. Micaela Lara Cadena, D-Mesilla, said in an interview.

The federal law, for example, eliminated personal exemptions, which can increase the amount of income subject to taxation. But other adjustments in the federal tax code are intended to keep filers from paying more in federal taxes.

New Mexico, meanwhile, largely “piggybacks” off the federal definition of income, so some taxpayers, depending on their circumstances, will pay more in taxes to the state.

Lara Cadena is among a few New Mexico lawmakers – both Democrats and Republicans – working on legislation that would cut state taxes to offset the federal changes, at least for future years.

More than half the states enacted tax legislation last year in response to the 2017 federal tax overhaul, according to the National Conference of State Legislatures. The adjustments varied by state, depending on how their income tax systems interacted with the federal changes.

In New Mexico, state economists told lawmakers last year to expect an increase in revenue, unless the state made changes to its own code. Late in the 2018 legislative session, the House overwhelmingly passed a bill aimed at minimizing the impact on taxpayers, but it didn’t make it through the Senate in time.

Rep. Jason Harper, R-Rio Rancho, said lawmakers simply failed to make the legislation a priority and adjust tax rates in time for this year.

“It was a mistake, and it’s embarrassing that we didn’t,” Harper said. “I’m expecting there to be outrage when people figure out that, through our inaction, we raised all of their taxes.”

Harper himself is working on a broad package of tax changes that would include revisions to New Mexico’s personal income tax system.

Lara Cadena’s proposal, House Bill 18, would target the tax relief to low-income families with children. The tax breaks would be on a sliding scale.

A family making over $350,000 a year, for example, would get a $25 credit, but a family with income of $25,000 or less would get $175 per qualifying child, which it could receive as cash back.

It would help the economy and get money to people who need it, Lara Cadena said.

“What a lot of evidence shows,” she said, “is that especially for low-income and working-poor families, that money will be spent quickly, and it will be spent locally.”

Legislative and executive branch analysts have offered a variety of estimates for how the legislation would affect future state tax revenue – ranging from $48 million a year to $76 million. In other words, the bill might be a net tax cut, assuming the federal tax overhaul is generating about $55 million in new state income tax revenue.

House Bill 18 – co-sponsored by Lara Cadena and fellow first-year Democratic Rep. Christine Chandler of Los Alamos – has cleared one committee and must pass at least one more before reaching the House floor.

A separate bill introduced in the Senate, meanwhile, would offer a flat $4,000 tax deduction for any dependent. That proposal, Senate Bill 300, is sponsored by Sen. Clemente “Meme” Sanchez, D-Grants.

His proposal would offer the $4,000 deduction for each dependent, regardless of the family’s income level or whether the dependent is a child or older relative.

It would cost the state about $66 million in revenue, according to legislative analysts.

In any case, this year’s proposals are too late for people filing their 2018 income taxes.

Richard Anklam, executive director of the nonpartisan New Mexico Tax Research Institute, said the effects of the federal tax overhaul will vary by household.

Some people won’t be negatively affected on their state taxes at all, enjoying the full benefit of the federal tax changes. And some filers will pay more in state taxes, but it will be more than offset by the reduction in federal taxes.

More specifically, Anklam said, state taxes will increase for single parents who don’t itemize and have more than one child and for married couples who don’t itemize and have more than two children.

“The increase gets bigger the more children they have,” Anklam said.

Some of the effects, Anklam said, have already shown up in people’s paychecks, through changes in how much is withheld for federal and state taxes.

Still, he said, there “may be an unwelcome surprise when you calculate your income taxes this year.”

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