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New Mexico tax breaks cost $1B in annual revenue

Copyright © 2020 Albuquerque Journal

SANTA FE – New Mexico forgoes about $1 billion in annual revenue through more than 100 tax breaks despite having little information about how effective many of them are, legislative analysts say in a new report.

The single most expensive “tax expenditure,” as analysts call it, is the roughly $250 million a year it costs to provide a gross receipts tax deduction on food and to reimburse local governments for much of the lost revenue, according to the analysis released Wednesday.

Other big-ticket items include tax breaks on prescription drugs, nonprofit groups, health care and film production – the last of which is expected to grow from about $83 million in payouts this year to $115 million in four years.

In Wednesday’s analysis, economists working for the Legislative Finance Committee – a bipartisan panel that meets between legislative sessions – said an annual tax report issued by the executive branch of government is “generally insufficient to verify whether a tax expenditure is resulting in the desired effect.”

In some cases, the analysis said, the state simply doesn’t require sufficient reporting from the recipients of tax breaks.

Economists working for the LFC encouraged legislators Wednesday to consider the revenue lost through tax breaks as a form of spending that should be reviewed just as any appropriation would.

“Tax expenditures create obligations that have to be paid no matter the state’s fiscal situation,” said Dawn Iglesias, chief economist for the LFC. “It’s often hard to know whether a tax incentive is doing what it was designed to do.”

Lawmakers have spent years debating – and sometimes passing – legislation aimed at simplifying New Mexico’s tax code and eliminating tax breaks that diminish the state’s revenue stream. The ultimate goal of some legislators is to reduce the gross receipts tax rate – now nearing 8% in much of the state – and make up the revenue by eliminating a host of deductions, exemptions and credits.

At least one high profile tax credit – covering film production – is expected to get some extra scrutiny in the next year.

Jon Clark, deputy secretary of the Economic Development Department, said his agency is required by law to carry out an objective assessment of the effectiveness of the film credit.

The requirement is part of 2019 legislation that more than doubled New Mexico’s annual spending cap on film rebates, from $50 million to $110 million. Some incentive spending isn’t subject to the cap.

Clark estimated the state will pay out roughly $83 million in film incentives this fiscal year but just $45 million next year – because of the interruption caused by the COVID-19 pandemic and the lag in paying out credits.

The payouts are expected to fluctuate between $111 million and $115 million in the three years after that.

Direct spending by the film industry is expected to range from roughly $408 million this year to over $530 million in future years.

Clark said the industry provides strong wages – exceeding $56,000 a year on average, or more than $10,000 higher than the average for private industry in New Mexico.

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