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SANTA FE – Changes enacted in recent years have made New Mexico’s tax code more progressive in some ways, but have also made the state more reliant on taxes levied on the oil and natural gas industries and other revenue sources, members of a key legislative panel were told Wednesday.
In addition, while an oil-driven revenue bonanza is expected to continue in the near future, the state’s long-term revenue growth might be insufficient to sustain current spending levels over the next 12 to 18 years, according to Legislative Finance Committee data.
The report was presented to lawmakers who are considering making more changes to New Mexico’s tax structure during next year’s 60-day legislative session.
Rep. Nathan Small, D-Las Cruces, said tax rebates and expanded tax credits for low-income New Mexicans approved during the last two years have meant a tax cut for most state residents.
He also said the tax changes, along with increases in teacher salaries and more money for college scholarship programs, could eventually help diversify and grow the state’s economy.
“We do have a particularly important window right now – and it’s not a window that will remain open forever,” Small told the Journal.
With the state seeing big budget surpluses in recent years due to a spike in revenue, the recent tax changes approved by lawmakers have reduced overall personal income tax revenue by about $957 million over the last three years, even with the creation of a new top tax bracket for the wealthiest New Mexicans.
Specifically, personal income tax revenue is projected to make up 23% of the state’s revenue base in the current fiscal year, but would have made up a much larger share of the total revenue mix – about 30% – if the tax code changes had not been approved.
To offset the proportional decrease in income tax revenue, gross receipts tax revenue and tax collections from the extractive energy industry now make up a larger share in the state’s tax base.
LFC Deputy Director Charles Sallee said during a Wednesday meeting in Silver City that’s not necessarily a bad thing, as recent policy steps like the creation of a state “rainy day” fund for cash-flush years have made New Mexico less vulnerable to big revenue swings.
However, he said the state’s approach to additional tax credits, rebates and other types of financial relief will have to be carefully considered.
“What’s the right balance between money circulating in the public sector and money circulating in the private sector?” Sallee said.
Even with the tax rebates and other revenue-consuming changes that include exempting Social Security income from taxation for most state residents, New Mexico state spending has increased by about 30% over the last four years.
Specifically, this year’s $8.5 billion budget signed by Gov. Michelle Lujan Grisham will set a record high for spending and represents a 14% increase over last year’s spending levels.
However, the average spending growth of 4.2% annually over the last six years is in line with state revenue growth during that same time period, according to LFC data.
Much of the state’s revenue growth has been driven by a surge in oil prices and production in southeast New Mexico, as the state last year passed North Dakota to become the nation’s second-highest oil producer – it’s now trailing only Texas.
Legislative Finance Committee chief economist Ismael Torres said it’s likely oil and natural gas levels will not start to significantly decline for several years – likely until 2029 or later.
He also said the recent tax changes could lead to economic growth that might – in the future – offset the short-term revenue reductions.
However, Richard Anklam of the New Mexico Tax Research Institute said that while the state’s tax code is generally in decent shape, the state’s current revenue largesse won’t last forever.
“It’s great when things are good … but it doesn’t stay that way,” he said.