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New top New Mexico tax rate likely to go into effect

Copyright © 2019 Albuquerque Journal

SANTA FE – It’s not official yet, but a new tax rate for top-earning New Mexicans appears likely to hit the state’s books in 2021.

The higher personal income tax rate was part of a broad tax package approved by the Democratic-controlled Legislature during this year’s 60-day session, but lawmakers tied its implementation to future revenue levels as part of a final compromise.

Specifically, the new tax bracket will only take effect if state revenue levels in the current budget year, which started July 1, do not exceed last year levels by more than 5%.

That now appears nearly certain to happen, as official revenue estimates released last week project that the state will take in about 1.8% less this year than it did last year, although this year’s projected $7.8 billion in revenue would still be the second-highest figure in state history.

“We do anticipate that tax change is going to take effect,” Legislative Finance Committee chief economist Dawn Iglesias told lawmakers during a three-day hearing in Red River last week.

If the tax changes are triggered, a new top personal income tax bracket of 5.9 percent would be created for individuals who make more than $210,000 annually. The higher rate would only be levied on income in excess of that amount. The state’s top bracket is currently 4.9 percent.

For married couples filing jointly, the same new tax bracket would apply to annual income in excess of $315,000.

The top budget official in Gov. Michelle Lujan Grisham’s administration, Finance and Administration Secretary Olivia Padilla-Jackson, will make the final determination about whether the criteria to implement the new tax rate have been met.

But that’s not expected to happen until late 2020, when the state’s annual audit is completed.

Lujan Grisham spokesman Tripp Stelnicki said Tuesday that the new tax rate, if it goes into effect, would affect an estimated 3% of New Mexico taxpayers.

He also described the implementation of the new rate as “tentative” but said it was approved to make the highest-earning state residents pay slightly more than currently pay.

“The intention of this change by the Legislature was to restore progressivity to the personal income tax system,” Stelnicki said.

If they ultimately take effect, the tax changes would represent the first personal income tax increase since former Gov. Bill Richardson, a Democrat, signed off on sweeping tax cuts in 2003 that were touted as a way to make New Mexico more economically competitive.

Some Democratic lawmakers have since expressed remorse about supporting the tax cuts, arguing that they never produced their promised economic benefits.

However, critics of this year’s tax legislation described it as a tax hike disguised as tax reform, and some business groups have expressed concern about the impact of the possible tax increase.

Jason Espinoza, the state director for the National Federation of Independent Business, said the new personal income tax rate could hurt small businesses, especially when combined with a recently approved increase in the state’s minimum wage, which will jump from $7.50 an hour to $9 an hour next year.

“The extent of the economic harm this will cause remains to be seen,” Espinoza said.

Other provisions in the tax package, which Lujan Grisham signed into law in April, include higher taxes on cigarettes, a new tax on vaping products, an increase in the state vehicle excise tax rate and a provision authorizing state and local governments to start levying a tax on online sales.

In addition, the law expands an existing tax break for working families and creates a new tax deduction for New Mexicans with multiple children that is intended to offset the state-level impact of a 2017 federal tax law signed by President Donald Trump.

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