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House Democrats unveil tax-overhaul proposal

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The proportion of U.S. high school seniors who are vaping tobacco products nearly doubled in the past year. A New Mexico House proposal would impose taxes on e-cigarettes. (Ded Mityay/Dreamstime/TNS)

Copyright © 2019 Albuquerque Journal

SANTA FE – Democrats in the state House are moving forward with a complex proposal to overhaul New Mexico’s tax system and raise about $323 million a year for government operations and road projects.

The legislation, House Bill 6, would raise taxes on cigarettes and motor vehicle sales, reshape the personal income tax system so higher earners would pay more, and impose taxes on all online retailers that sell to New Mexico residents.

The bill would also reduce some taxes – doubling a tax credit for “working families” and creating deductions aimed at offsetting unintended state tax increases caused by the 2017 federal tax overhaul.

The net effect, however, would be about $286 million in new revenue for the state’s general fund and $37 million for state and local roads, according to a legislative analysis of the bill.

Rep. Javier Martínez, an Albuquerque Democrat and co-sponsor of the bill, said the goal is to modernize New Mexico’s tax system and create a sustainable source of new funding for public schools.

“This is the first step of a process that’s going to take several years, I believe, to get there,” he said, “but this is a very important first step.”

The bill – a reworked version of earlier legislation – was unveiled Monday to mixed reviews.

Business groups and energy companies said the proposal could damage the state economy, discourage investment in New Mexico and exacerbate the challenge of recruiting physicians or other high earners to the state. They also said the timing doesn’t make sense.

“It’s very concerning,” Jack Bent of the New Mexico Business Coalition told lawmakers. “In talking with our neighbors and fellow taxpayers, how do we explain when we have a tax surplus that we’re going to actually raise taxes?”

The proposal comes as New Mexico enjoys a revenue boom driven largely by oil production in the southeastern part of the state. The state House sent a $7 billion budget proposal – nearly an 11 percent increase over current spending levels – to the Senate for consideration last week.

State economists have warned that oil and gas revenue is likely to fluctuate substantially in future years.

Much of the proposed spending increase is for public schools – after a landmark court ruling that found New Mexico is violating the rights of some students by failing to provide a sufficient education.

Republican lawmakers on Monday raised a variety of technical questions about the bill. They said the proposal failed to call for a reduction of New Mexico’s gross receipts tax rate – a longtime goal of efforts to overhaul the state tax code.

Rep. Jason Harper, a Rio Rancho Republican who has pushed to simplify the tax code without raising revenue overall, said more analysis is needed. Some of the bill’s provisions appear to raise income taxes on families, while other parts would give them a break, making it difficult to project what the net change would be, he said.

“We’re potentially raising taxes on teachers and middle-income families,” Harper said.

But the bill drew support from cities and counties, left-leaning advocacy groups and Gov. Michelle Lujan Grisham’s administration. They described it as a sensible way to stabilize government revenue and reduce New Mexico’s dependence on the oil and gas industry.

“The bill goes a long way to diversify our revenue sources in a way that will provide stability to the general fund,” said Stephanie Schardin Clarke, secretary of the state Taxation and Revenue Department.

Supporters said the proposal would help ensure the state could cover increased education spending in coming years, even if the oil boom doesn’t last.

Lawmakers accepted testimony from both sides Monday and plan to consider proposed amendments and perhaps vote on the bill Wednesday. The proposal is now in the House Taxation and Revenue Committee, potentially its last stop before moving to the House floor.

The proposal would:

• Revise the tax systems for hospitals, with the goal of creating a level playing field for not-for-profit, government and for-profit hospitals. Not-for-profit hospitals currently are exempt from paying state taxes. It’s expected to raise $92 million in general fund revenue in the next fiscal year.

• Impose gross receipts taxes on sales made by online retailers to New Mexicans, including the imposition of the city and local parts of the tax. It’s expected to raise $42 million in general-fund revenue next fiscal year.

• Overhaul the state’s income tax brackets to make the system more “progressive” rather than flat. People would face a higher tax rate, for example, as their income climbs.

The top tax bracket for the highest earners, for example, would climb from 4.9 percent now to 6.5 percent under the proposal. For a married couple filing jointly, the top tax bracket would kick in for families with income of $300,000 or more. It’s expected to raise about $132 million.

In effect, the proposal would partly undo a 2003 personal income tax cut that was pushed by then-Gov. Bill Richardson and delivered the largest reductions to high-income state residents.

• Double the “working families” tax credit allowed for low- and moderate-income workers. The credit is for people who are eligible for the federal earned income tax credit. Instead of being able to claim 10 percent of their federal credit, they could claim 20 percent.

It’s expected to cost about $53 million in revenue.

• Establish an income tax deduction for taxpayers who have more than one dependent as part of an effort to offset an unintended state tax increase caused by the 2017 federal tax overhaul. It’s expected to cost about $48 million in revenue.

• Repeal parts of the capital gains deduction allowed for personal income taxes, which would raise about $62 million.

• Increase the excise tax on motor vehicle purchases from 3 percent to 4.2 percent, which would raise about $65 million. The money would largely go to the general fund, though some lawmakers broached the idea of changing the bill to send the revenue to the road fund instead.

• Raise taxes on tobacco and impose taxes on vaping products, which would generate $20 million for the state general fund.

• Change how corporate income taxes are calculated as a way to keep multistate corporations from “shifting” their income to another state to avoid New Mexico taxes. It would help some companies and hurt others, legislative analysts said, so the overall impact on state revenue is unclear, but likely positive.

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