ALBUQUERQUE, N.M. — The state of New Mexico left about $1 billion on the table last fiscal year in the form of what are called tax expenditures, according to the Legislative Finance Committee. Whether these expenditures are worth the cost is the subject of LFC hearings scheduled for a week from today at the Roundhouse in Santa Fe.
The state Taxation and Revenue Department defines a tax expenditure as “deviations from a baseline tax system created by specific tax law provisions. … Put simply, tax expenditures may be thought of as spending through the tax code.”
The exact cost of tax expenditures isn’t known. Tax and Rev publishes a huge report every year that is supposed to quantify them. The report warns that there is disagreement on what constitutes a tax expenditure and that the cost of some of them can only be guessed. The department says it is sure there are 130 tax expenditures, but there are 23 more tax policies that may or may not be expenditures, depending on your point of view.
The state provides expenditures both to encourage development of renewable electricity generation resources and affordable housing. Expenditures are spent to offset the cost of agricultural water conservation. Sales of aircraft get GRT exemptions. A variety of tax code changes implemented over the years, for all practical purposes, have eliminated corporate income taxation on manufacturers. Active-duty members of the armed forces are exempt from state income tax, and it has regularly been proposed in the Legislature to exempt veterans from some or all personal income taxes.
Tax and Rev says expenditures “may reflect an overarching statewide policy, such as to promote the general welfare of all citizens, or may reflect a specific purpose, such as to incentivize a certain type of consumer behavior, economic development, or job creation.”
Because the state still needs to pay its bills, revenue has to come from somewhere. Every tax expenditure has to be offset somehow by tax collections from someone. The hope is that on balance tax expenditures do New Mexicans enough good that paying a higher gross receipts tax, for example, is worth it.
And therein lie the policy questions. Under what circumstances, if any, should the state of New Mexico reward some taxpayers over others? Should the tax code be used to encourage consumer or commercial behavior? When does a tax expenditure really promote the general welfare of all citizens?
Some of the biggest tax expenditures benefit the health care industry. The LFC says that the state gave up tax collections worth $250.6 million in 2015 to the industry. Gross receipts tax exemptions to health care providers alone were valued at $38.7 million in the 2015 fiscal year. The state also is required to pay counties to offset the GRT revenue they lose to the health care provider exemption. That “hold-harmless” provision, which is being phased out, cost the state another $31.4 million. So not only does the state not collect GRT from providers, but it has to dip into other revenue sources to pay the counties the share of taxes they aren’t allowed to collect from providers.
(Full disclosure: My wife is a health care provider who can claim GRT exemptions.)
The push to exempt providers from some of their GRT obligations gathered steam in 2003. Supporters of the exemption said the state was losing doctors at a high rate because they were forced to pay gross receipts tax. The myth developed that they were all running to Texas, which not only doesn’t require them to pay GRT but also has no personal income tax. Texas has other taxes we don’t have, and has a much higher property tax rate, but that’s another story. Data from trade groups and state licensing boards showed New Mexico was gaining doctors, not losing them, but the exemption was enacted in 2004 anyway.
Supporters of the exemption argued at the time that because at least 20 percent of our population had no health insurance, medical providers were out of pocket a substantial sum for providing charity care and should be compensated. With the advent of the Affordable Care Act, that is no longer true. Charity care is almost nonexistent since the ACA enabled the state to expand Medicaid to working-age, able-bodied adults and required almost everyone to carry health insurance or pay a tax.
The health care professions are among the very few in our state where employment is growing, according to the state Department of Workforce Solutions.
Thus we have an exemption that was based on mythology and that is compensating certain professionals in one of the state’s few thriving industries for an expense they no longer incur. Meanwhile, other taxes have to increase to keep the state’s books balanced.
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