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Tax changes weighed to ease revenue volatility

Copyright © 2020 Albuquerque Journal

SANTA FE – New Mexico’s long-standing budgetary reliance on the oil and natural gas industries has led to big swings in state revenue levels in recent years.

With the future of oil production uncertain, a Philadelphia-based consulting group on Tuesday recommended several changes to the state’s tax code to diversify its revenue base – legalizing recreational cannabis, increasing the gas tax rate and reinstating the gross receipts tax on food items while adding a new tax credit for low-income taxpayers, among them.

Some of the ideas have already been debated by lawmakers, including making New Mexico the 16th state to legalize recreational cannabis for adult users.

But others would likely trigger intense debate at the Roundhouse, as previous attempts to repeal the 2005 food tax exemption have been met with fierce opposition.

Randy Bauer of PFM Group Consulting, who wrote the report, cited recent national reports indicating New Mexico’s tax revenue stream is among the most volatile in the nation, largely due to its reliance on the historically boom-and-bust extractive energy industries.

“There’s no doubt that concentration has risks … associated with the state’s taxation and revenue structures,” Bauer said.

He also said the tax pyramiding that occurs under the state’s gross receipts tax system is unmatched nationally. Tax pyramiding occurs when taxes are levied several times on the same product or service.

For the current budget year, the oil and natural gas industry is projected to make up more than 40% of the $7 billion or so in total state revenue, according to the Legislative Finance Committee.

That figure represents both direct taxes and royalties, as well as revenue that flows into the state’s general fund from its permanent funds.

An oil price crash earlier this year – prices have since partly recovered – was the main reason for a projected $857 million revenue decline for the current budget year, according to revised estimates released last week by executive and legislative economists.

Rep. Christine Chandler, D-Los Alamos, said during Tuesday’s meeting of the Revenue Stabilization and Tax Policy Committee that diversifying the tax base – presumably by taxing cannabis or other untaxed goods – could allow for other tax rates to be lowered.

However, House Minority Whip Rod Montoya, R-Farmington, expressed concern about the Democratic-controlled Legislature approving tax hikes during the coming 60-day session.

He and other Republicans also said the state’s current tax code and regulatory framework make New Mexico less attractive to businesses than other neighboring states.

“The overall tax burden on New Mexico is not low,” Montoya said.

Past tax cuts called ineffective

Several of the 14 tax policy recommendations made by PFM Group would involve undoing past tax changes, including a 2003 personal income tax cut pushed by then-Gov. Bill Richardson.

The report claimed such tax cuts have not been effective in sparking economic growth in New Mexico and other states that implemented similar policies, as initially touted.

Due to some of the state’s past tax changes, Rep. Javier Martinez, D-Albuquerque, said too much of the tax burden currently falls on working New Mexicans.

He said he would support a bill to expand the state’s Working Families Tax Credit during the coming session, adding, “I think there’s a commitment not to repeat the mistakes of the past.”

The nonprofit group New Mexico Voices for Children also called Tuesday for an expansion of the Working Families Tax Credit, which reduces state income tax liability for low-income residents.

Meanwhile, Senate Majority Leader Peter Wirth, D-Santa Fe, said that over the years, New Mexico has narrowed its gross receipts tax base by approving tax breaks for various industries, which has caused rates to increase.

The current tax rate is higher than 8% in many New Mexico cities, including Santa Fe, Las Cruces, Farmington and Deming.

“It feels to me that it’s harder and harder to get ourselves out of that without a total restructuring,” Wirth said.

New tax rate to take effect

Although Gov. Michelle Lujan Grisham has not unveiled her full legislative agenda for the session, Taxation and Revenue Secretary Stephanie Schardin Clarke said during Tuesday’s meeting it’s unlikely the Lujan Grisham administration will propose a large “omnibus” tax package.

But she left open the possibility of some proposed tax changes being introduced, while also pointing out that a new tax rate for top-earning New Mexicans that’s still lower than pre-2003 rates will hit the state’s books in January.

The higher personal income tax rate was part of a broad tax package approved in 2019, but lawmakers tied its implementation to future revenue levels as part of a final compromise.

With those revenue thresholds triggered, a new top personal income tax bracket of 5.9% will be created for individuals who make more than $210,000 annually – up from the state’s current top bracket of 4.9%. The higher rate will be levied only on income in excess of that amount.

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


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