SANTA FE — A year after signing a bill that lowered the state’s gross receipts tax base rate for the first time in decades, Gov. Michelle Lujan Grisham is teaming up with an unlikely ally — Republican state Rep. Jason Harper of Rio Rancho — on a proposal to further cut the tax rate New Mexicans pay on most purchases and services.
But the bill filed this week could encounter opposition from Albuquerque and other local governments around New Mexico, since it also aims to reduce tax “pyramiding” by exempting from taxation professional services like accounting and legal work.
A preliminary estimate by the New Mexico Municipal League projects that provision alone could cost Albuquerque up to $30 million in foregone revenue per year.
“We are conducting our own analysis of the bill, but generally we are opposed to anything that will hurt our budget and our ability to support public safety,” city spokeswoman Ava Montoya said Friday.
The tax proposal, House Bill 367, could end up being folded into a tax package advanced by lawmakers in the final weeks of this year’s 60-day legislative session, which ends March 18. But it’s not yet clear which provisions might end up in the final version of the package.
Lawmakers are also considering proposals to adjust the state’s personal income tax brackets and expand a recently-created child tax credit, among other plans.
The Governor’s Office said Friday the tax measure supported by the governor would provide more than $400 million in financial relief to New Mexico residents and small businesses, amid rising inflation and other market factors that have caused the cost of some basic grocery supplies to skyrocket.
“This tax cut builds on the historic reductions we enacted last year, and the common sense anti-pyramiding provisions in this bill will make goods and services even more affordable for all New Mexicans,” Lujan Grisham said in a statement. “Plus, it’s going to make New Mexico businesses even more competitive, continuing this administration’s commitment to making our state the very best place to do business.”
How the tax changes would work
The tax package approved last year by lawmakers amid an ongoing state revenue boom lowered the state’s gross receipts tax base rate by 0.25 percentage points over a two-year period, among other things. The first reduction took effect in July 2022, with the second installment scheduled to kick in this summer.
The proposed additional 0.25 percentage point tax cut would be on top of that, meaning the state’s gross receipts tax rate would drop to 4.625% in July. Cities and counties then levy local taxes on top of that.
Harper, who has worked on tax issues for nearly a decade at the Legislature, said lawmakers might consider a provision at least temporarily barring local governments from increasing their tax rates in response, as such actions could essentially offset the proposed state tax cut.
“We’ve done a lot to help the local (governments) and they are doing really well from a revenue perspective,” Harper told the Journal.
He also said the proposal to reduce tax pyramiding — a phenomenon that occurs when the state levies taxes multiple times on the same goods or services — could allow New Mexico’s roughly 160,000 small business to hire more employees, as many larger businesses have in-house accountants and lawyers.
“I like to say good tax policy is numbers and sense — it’s not politics,” said Harper of his decision to team up with the Democratic governor on the bill. “She sees the great potential this has to help the state.”
In addition to Harper, the other legislative sponsors of the tax bill are Democratic Sen. Benny Shendo Jr. of Jemez Pueblo and Republican Rep. Joshua Hernandez of Rio Rancho.
Revenue boom gives lawmakers tax options
New Mexico’s gross receipts tax system has already come under the scrutiny of lawmakers in recent years, as a multitude of exemptions, deductions and other breaks enacted over the last several decades have led to an increase in tax rates.
Even after the recent tax cut, some cities still have overall tax rates in excess of 8%, including Farmington, Santa Fe and Las Cruces.
Some lawmakers have said the time is right this year for big changes to New Mexico’s tax structure given the revenue bonanza that also allowed lawmakers to approve tax rebates of up to $1,500 for New Mexico households last year.
A budget bill being crafted in a House committee is expected to leave funding available for tax changes — including an additional round of rebates — though the targeted dollar amount is not yet clear.
But Taxation and Revenue Secretary Stephanie Schardin Clarke said the state would still be on stable fiscal footing if the tax changes are approved, citing robust cash reserves that are projected to exceed $2 billion for the current budget year.
