February 14, 2003
Legislature Gives Final Approval To Tax Cut
By Barry Massey
The Associated Press
SANTA FE The Legislature gave final approval to a compromise tax reduction package on Friday and sent it to Gov. Bill Richardson, who will sign it into law.
The legislation will drop the top marginal rate for the personal income tax over five years and phase in a 50 percent deduction for capital gains.
Passage of the legislation, developed by a House-Senate negotiating panel, was a major victory for Richardson, who had pushed lawmakers to pass a large tax cut early in the session.
The Senate endorsed the measure on a voice vote, and the House approved it a short time later, also on a voice vote. That sent the bill to the governor.
"This tax cut will send a clear to business leaders in New Mexico and throughout the United States that New Mexico is ready for business, and it will put money in the pockets of New Mexicans," Richardson said.
House Speaker Ben Lujan, D-Santa Fe, called passage of the tax cut "a great day for New Mexico."
"I think the New Mexico Legislature has proved that they can work with the chief executive, with our new governor," he said. "It also shows that we have a governor that is willing to have a give-and-take attitude. The governor did not get everything that he wanted. We, in the House, didn't get everything we wanted."
The compromise eliminated a circuit-breaker provision opposed by Richardson that House Democrats advocated. That provision could have delayed parts of the proposed personal income tax cuts if the state's finances weakened.
The tax measure provides for:
Stretching out the implementation of the tax reduction, phasing it in over five years instead of four.
Dropping the top marginal rate, when fully implemented, to 4.9 percent instead of 5 percent as originally proposed.
A 50 percent deduction for net capital gains, which will be phased in over five years.
The compromise calls for the top marginal rate to drop to 7.7 percent in tax year 2003, 6.8 percent in tax year 2004, 6 percent in tax year 2005, 5.3 percent in 2006 and 4.9 percent starting Jan. 1, 2007.
The measure will phase in a 50 percent deduction for net capital gains over five years.
Once fully implemented, the measure will cost the state nearly $360 million in lost revenue.
The top rate, once it drops to 6 percent, will apply to taxable income of more than $24,000 for a married couple filing a joint return and for and more than $16,000 for a single tax filer. Those same brackets will remain in place when the rate falls to 5.3 percent and 4.9 percent.
By phasing in the tax cuts over a longer time, the yearly revenue loss would be evened out and reduced somewhat in the final phase of the implementation period.
That helps ease concerns of House Democrats, who had insisted on the circuit-breaker as a possible safety valve to protect against a budget shortfall if state revenues dipped unexpectedly when the last and most expensive phases of the tax cut were taking effect. Richardson and the Senate had opposed the circuit-breaker.
Under the four-year tax reduction measures approved previously by the House and Senate, the third year of the tax cut when the rate was to fall to 6 percent would have cost nearly $100 million. The final year, when the rate was to fall to 5 percent, would have cost more than $150 million in lost revenue.
Under the compromise, the fourth year installment will cost about $108 million and the final year will cost $85 million.
The governor says lowering the top income tax rate will make New Mexico more competitive with other states and help in recruiting high-wage businesses.
Dropping the top rate to 4.9 percent would give New Mexico a lower top marginal rate than Arizona, which is at 5.04 percent.
Sen. Carlos Cisneros, D-Questa, a member of the conference committee, said the proposed 4.9 percent would be an even stronger tool for economic development than the initial 5 percent rate.
"We believe we came out with a good compromise," said Cisneros.