In many ways, it’s the ultimate paradox.
The state’s coffers are brimming with cash from an oil boom.
By the time the next legislative session is over, New Mexicans may see some of their taxes going up anyway.
Beneath the numbers of New Mexico’s anticipated budget surplus, lawmakers and economists see a tax system out of whack. It is heavily reliant on taxes from sales and services — a rushing stream of revenue that could dry up with the next downturn in the oil markets. Meanwhile, high earners pay about the same rate of state income tax as those just scraping by. And the state boasts some of the lowest property tax rates in the country.
Almost every legislative session spawns a proposal to raise a tax here or there. But with corporate tax cuts and past oil industry slowdowns fresh in the minds of many, lawmakers are heading into the 2019 legislative session looking with a particular urgency to change how the state raises money.
“We’re riding a roller coaster uphill,” said Senate Majority Leader Peter Wirth, D-Santa Fe. “Diversification is absolutely critical.”
If there is a debate on taxes in the 2019 session, it likely will hit on familiar themes.
As they have in the past, Republicans in particular will argue that reinstating the tax on food would allow the state to lower the tax rate overall and make New Mexico more attractive to businesses. Democrats, meanwhile, likely will argue for making the personal income tax more progressive and for scrapping an exemption on the sale of investments — measures they contend would make the state’s tax system fairer.
Of course, any of these changes will have to get through a scrum of lobbyists pushing to protect carve-outs and giveaways for particular industries.
Here is what is on the table:
1. Gross receipts taxes
If there is one thing Republican and Democratic leaders can agree on, it is that the state’s tax on goods and services is too high. Santa Fe residents know what they’re talking about: The gross receipts tax totals 8.4 percent in the city.
New Mexico for years has relied on this stream of revenue more than most states. About 43 percent of revenue in the state’s next budget is expected to come from gross receipts taxes, the Legislative Finance Committee calculates.
And the vast majority of the growth in gross receipts taxes comes from spending in the oil and gas industry in two counties — Eddy and Lea.
Policymakers say this presents two problems. For one thing, leaders argue, the tax wards off businesses and is regressive — falling most heavily on those with lower incomes who use a larger share of their earnings on necessities.
Moreover, this source of revenue can fluctuate dramatically with booms in industries like oil, making it what economists have referred to bluntly as a fickle source of funding for government services.
So some lawmakers are bound to push for broadening the base of what is taxed to lower the total rate.
The question is how.
Democrats and some Republicans have supported taxing internet sales, arguing it would be fairer to local businesses subject to the gross receipts tax that are competing with online giants that have long gotten away without it. Some major retailers, such as Amazon, are already charging gross receipts tax as more states take similar steps. Estimates of how much money all of this could raise vary widely.
But state Rep. Jason Harper, R-Rio Rancho, said there is no way of significantly lowering the gross receipts tax without reinstating the tax on food, which New Mexico scrapped in 2004. And he is not alone. Fiscally conservative lawmakers argue that taxing food is the only way to raise enough revenue to substantially lower the overall rate.
Democrats generally oppose the measure as penalizing low-income residents of one of the poorest states in the country, who spend a larger share of their income on basics such as food. The Catholic Church is one of the most vocal opponents of such proposals, dubbing it the “Tortilla Tax.”
Harper does not expect the food tax will pass this session. And Gov.-elect Michelle Lujan Grisham said at a candidate forum earlier this year she would not support it, calling the measure regressive.
One area where Republicans like Harper and Democrats might be able to agree is in ending a series of deductions often geared toward particular industries that add up to at least tens of millions of dollars a year.
Yes, the state can afford the deductions now.
The upside to addressing these issues amid a budget surplus, some argue, is that there is more reason to keep the changes revenue neutral rather than use taxes as a means of raising money.
“There’s less excuses for turning tax reform into a revenue grab,” said Paul Gessing, president of the conservative Rio Grande Foundation. “It gets hard to justify, ‘We’re going to raise taxes significantly because we need the money.’ You don’t need the money right now.”
2. Income taxes
New Mexico’s top personal income tax bracket is not necessarily an exclusive group.
It’s any person earning more than $16,000 a year.
While much of the debate over tax reform in recent years has focused on the gross receipts tax, some argue that ensuring more stability for the state’s budget demands changing the income tax, too.
“We really have a flat income tax in New Mexico,” said House Speaker Brian Egolf, D-Santa Fe.
As it is, New Mexico gets a smaller share of revenue from personal income tax than many other states, according to data from the Tax Foundation.
Egolf argues that raising income tax rates on higher earners and eliminating a deduction for capital gains — that is, the sale of investments — could allow the state to lower the gross receipts tax.
Proponents argue that would lift some of the burden on low-income households and would diversify how New Mexico raises revenue.
Besides, the state has slashed income taxes for households and corporations over the years, with proponents arguing such measures would entice companies to bring jobs to the state. Critics counter that logic has been undermined by a slow recovery from the recession and one of the highest unemployment rates in the country.
“Some of those tax policy changes clearly did not accomplish what they were intended to accomplish,” said James Jimenez, director of the liberal advocacy group New Mexico Voices for Children.
3. Property taxes
Property taxes are up to the voters, with the money flowing to local governments and schools.
The state also happens to enjoy some of the lowest property tax rates in the country. And that’s perhaps just as well in a state where plenty who are land rich also are cash poor.
But some policymakers mention now and again that if New Mexico is going to balance its tax system, it should rethink its low property tax rates.
Big changes would take a constitutional amendment.
All of this is up in the air. The numbers vary widely. Lawmakers will not begin filing legislation until Monday. The Revenue Stabilization and Tax Policy Committee is expected to get a few options for comprehensive tax reform next week, too.
Expect plenty of proposals, though.
Because if there is an easy way and a hard way of doing tax reform, this — with a budget surplus — has got to be the easy way.