In 2004, the state enacted a tax credit meant to attract high-paying jobs to New Mexico. Lawmakers envisioned a policy that would help businesses hire skilled workers, awarding them up to $12,000 per employee to offset expansion costs.
But the law was poorly written, and companies found loopholes that were soon costing the state millions of dollars in lost taxes without creating the bounty of well-paying jobs it was supposed to.
Out-of-state firms that had contract workers in New Mexico used the law to claim rebates. So did companies that merged or acquired firms in the state. They set up new entities to collect state tax credits for existing payrolls.
Lawmakers tried to fix the problems, making changes in 2007, 2008 and again in 2013. But the law remained imprecise and the state continued to lose millions of dollars.
“Every time we had a committee hearing, we were broadcasting what was wrong with it,” said Demesia Padilla, secretary of the state Department of Taxation and Revenue. She said the agency got 300 applications for the tax credit in the days before changes took effect in 2013.
“They were flying in staff with briefcases to file,” she told a panel of lawmakers last week.
Even today, questions remain about the law’s intent and whether it is really helping the economy and creating jobs, according to lawmakers.
The state paid out more than $3 million for the credit in 2010. That amount ballooned to more than $50 million each of the past two fiscal years.
All the deficiencies in the bill may have cost taxpayers $100 million overall, according to Padilla.
The high-wage credit for jobs is one of 130 tax breaks in New Mexico that have eroded $1 billion from state coffers in a year when the government has a deficit, is cutting services and laying off workers. To balance the $6 billion general fund budget, Gov. Susana Martinez and lawmakers have already spent down $700 million in reserves and are now contemplating a special session to reduce spending even more. The 2016 budget ended with a $220 million deficit, while 2017 might be short $430 million.
Martinez and fellow Republicans, who are the majority in the House of Representatives, are refusing to raise more money through tax increases or higher fees. Democrats, who control the state Senate, are resisting further spending cuts, especially to public education.
Even with that deadlock, there is some agreement that the state needs to move forward on tax reforms. That means closing loopholes and simplifying the hundreds of exemptions, if not to bring in more money then to sustain the services that are already in place.
“This has to be fixed,” said Sen. George Muñoz, D-Gallup. “We’ve always done tax credits for political reasons in New Mexico, and that has hurt us. We end up where we are today.”
A matter of timing
Sen. Peter Wirth, D-Santa Fe, has been a leader in trying to fix some of the tax loopholes. When he moved ahead with efforts in past years, colleagues told him the timing wasn’t right because the state didn’t need the revenue.
“Now we have to do it. We don’t have a choice,” Wirth said. “This is an opportunity to look up and down the list. Some can be eliminated, some can be capped. This is the window right here. Let’s do it now.”
There are lots of ways to encourage economic activity through tax breaks, from purchasing fuel-efficient appliances to expanding a business to attracting medical doctors. Legislators call the credits or deductions “tax expenditures” because they are taking money away from the pool of taxes to encourage actions that are meant to have a public benefit.
There are three principal ways to do that: credits, actually getting money refunded; deductions, paying a lower amount of tax; or exemptions, paying no tax at all, which is the case when nonprofits make some purchases for their operations or when families buy groceries that are exempted from the gross receipts tax.
Even Padilla, part of Martinez’s administration, said last week that the credits aren’t expanding the economy the way they were supposed to. “They’re costing the state too much money,” Padilla said.
As the energy industry rebounds from a slump, there are new concerns about the high-wage credit, which is supposed to benefit companies that create jobs with salaries of at least $60,000 in urban areas and $40,000 in rural communities. Lawmakers say there will be a slew of new claims as companies hire back the same workers they laid off.
Among the top recipients of the credit in the past three years is Navajo Refining, which has received some $5.9 million. Other energy firms, such as Conoco Phillips, Louisiana Energy Services, Yates Petroleum and Halliburton, one of the largest companies in the world, all received substantial tax breaks for hiring employees. Another oil service operator, Baker Hughes, plus Chevron, Petrolite Equipment and Exterran Energy Solutions have all received tax reductions under the law.
“Anecdotal reports indicate the oil and gas industry was not an intended recipient for this credit,” states a recent analysis by staff of the Legislative Finance Committee.
The company that has received the largest breaks since 2013 is Intrepid Potash-New Mexico with $15.5 million. Another potash firm, Mosaic Potash, received $5.5 million. Potash is mostly used in fertilizer, and mining can be seasonal depending on the market.
And among those who have cashed in are companies largely funded with taxpayer money to begin with. Lockheed Martin received a break of $4.8 million, and Los Alamos Technical Associates received $337,000. Both are part of partnerships that manage the national laboratories in New Mexico.
Companies such as Facebook, which announced last week that it will build a data center in Los Lunas, would be entitled to take the credit. Facebook also is due millions in other incentives crafted by the state to lure it to Los Lunas.
The credit has also gone to businesses adding jobs because of natural growth, such as Molina Healthcare, UnitedHealthcare, Sotheby’s International Realty, Smith’s Food and Drug, Albertsons, Kohl’s, Lovelace, United Parcel Service, Dollar Tree, AutoZone and Santa Fe Brewing Co.
A difficult road ahead
Scaling back tax credits and deductions is complicated in New Mexico. Tax revenues are volatile because of the state’s reliance on crude oil.
Sen. John Arthur Smith, a Democrat from Deming who chairs the Senate Finance Committee, said the rising price of crude in 2013-14 helped the state budget and masked the real erosion caused by all the tax credits.
Rep. Jason Harper, R-Rio Rancho, who chairs an interim committee on tax stabilization, unveiled a platform last week that he said would help lawmakers analyze how much closing or eliminating certain tax loopholes will cost. Harper is an engineer with Intel who has three scientific patents.
The software he presented — designed by Ryan Gleason, a former state tax analyst working on contract for the House Republican majority — links 220 Excel worksheets that recalculate tax rates in cities and counties each time one incentive is changed or eliminated.
When the gross receipts tax was put in place in New Mexico in the 1930s, it was the envy of other states. Unlike a regular sales tax, only collected from consumers, the gross receipts tax was broader, covering wholesale trade and distribution and products sold between businesses. The original rate in New Mexico was about 2 percent.
Today the state rate is 5.12 percent, with cities receiving nearly a quarter of that amount. The tax provides 75 percent of all money to the cities in New Mexico and 43 percent of money the state general fund uses to pay for basic services, including public education and public safety.
As the state started carving out exemptions and credits — and there are now hundreds — the rate on gross receipts taxes rose to make up the lost revenue. The last big increase came when lawmakers removed the gross receipts tax on food and medicine and increased it on everything else.
This has led to higher and higher rates, especially in cities and counties that have local options for additional gross receipts taxes to pay for hospitals, health care, roads, water and sewer lines, as well as projects such as Spaceport America and the Rail Runner Express commuter train.
Harper’s goal for the 2017 legislative session is to lower the state gross receipts tax rate as much as possible.
How low can it go? If all the exemptions were eliminated, it would return to the original 2 percent rate or even less, according to his modeling.
Harper said he’s been tinkering with various ideas for four years, and the 2017 session is the time to move forward.
“I’m for eliminating all deductions and credits and lowering the overall rate. I think now’s a great time to do it,” Harper said.
Administration: Go slow
Padilla said she is working with the Department of Finance and Administration to look at many of the tax laws and move to make changes. But the process is tedious and requires legal expertise.
Frank Crociata, tax policy director at the Taxation and Revenue Department, is encouraging lawmakers to write tax bills more carefully. For instance, if a measure states a business can deduct 10 percent of its costs, he asks, “What are costs?” Maybe that term needs to be more precise.
“Typically, we do write a bill with a specific thing in mind,” he said. “We’re trying to think more broadly about unintended consequences.”
A recent case that brings that point home is going to cost state taxpayers millions over the next several years.
It involves an effort to attract physicians and medical providers to New Mexico by allowing “practitioners” to deduct the state gross receipts tax from business purchases.
The language of the law was challenged by Healthsouth Rehabilitation. It claimed there was nothing in the law that said a practitioner was an individual and argued hospital entities should also qualify for the tax deductions.
The state opposed that position, but a hearing examiner agreed with Healthsouth and ordered the state to pay or credit it $400,000 for two tax years.
“The hearing officer’s decision resulted in a flurry of new claims and amended claims,” according to a legislative analysis. The cost of that deduction is now climbing and could double to $127 million in 2o17, according to an analysis.
Cabinet Secretary Padilla said when her department tries to narrow specific provisions in a law, it is sometimes stymied by legal rulings like Healthsouth’s.
“Yes, we tried to move it back to the intent, but the hearing office said we went too far,” she said.
Padilla also said the state is seeing more claims as result of its own transparency. New Mexico was one of the first states to publish a comprehensive report of all its tax laws, known as the Tax Expenditure Report.
Many consultants are now using the list of credits and exemptions to audit businesses on a commission basis. They can go back three previous tax years plus the current year to claim any back credits or taxes owed.
And Padilla, a former private tax preparer herself, said consultants paid on contingency are going to wait as long as possible to get a higher possible refund.
She said of the $57 million paid out in high-wage claims for fiscal year 2016, just $17 million was for that year. The remainder was for back claims. “A significant portion of the money goes back to 2015,” she said.
She added changes are necessary, especially with the budget deficit, but it can’t be done all at once because many businesses and individuals have made investment decisions based on the laws.
“For us to say all credits are bad, that’s not true. You can’t change this overnight,” she said. “You have to do it in small doses. You can’t just pull the rug out from people.”
And that’s where the debate will come in the 2017 legislative session, which begins Jan. 19.
Wirth wants to close loopholes and make the tax system more equitable. He points to the capital gains deduction that allows a deduction on state income tax beyond that allowed by the Internal Revenue Service. It is especially lucrative for those who make money buying and selling stocks, bonds and real estate and was passed when Gov. Bill Richardson, a Democrat, was trying to attract more wealthy retirees to the state.
The cost is $40 million a year.
“I think we should eliminate that one,” said Wirth, who as a private-practice lawyer represents some of those high earners.
That effort, however, might very well be seen as a tax increase by Gov. Martinez.
“That’s the philosophical question,” Wirth said. “She may say, ‘I can’t increase taxes, but if we can look at all the credits, exemptions and deductions, that’s what we should do.’ In a crisis of this magnitude, I’m hoping we can finally fix things in our tax code.”
Contact Bruce Krasnow at firstname.lastname@example.org.
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• Vew the state’s 2015 Tax Expenditure Report at santafenewmexican.com.