Friday, February 17, 2017
53rd Legislature, First Session
This session has reached the halfway mark and the deadline for bill introduction has passed. On Feb. 15 the count stood at 1132 bills; 568 in the House and 564 in the Senate.
There is still a lot of work to be done this session, most importantly is the development and implementation of a budget. As expected, there is no change in the revenue forecast. The expectation is that revenue falls $103 million short of current state spending, $5.9 billion. This coupled with the need to rebuild reserves call for something in the neighbor hood of $200 million in new revenue, budget cuts or budget magic (“sweeping funds, etc.). While the outlook for oil prices is a bit more favorable, the outlook for employment growth is somewhat less, so it balances to put us just where we were back in December when the last forecast was made.
As budget writers contemplate how to balance the budget, but also to build back cash reserves both to protect the state’s credit rating and to deal with unforeseen circumstances, there are two schools of thought to accomplish the goal of raising approximately an another $200 million: (1). Raise taxes, or; (2) Cut spending. Democrats, who have sizable majorities in both houses tend towards number one, “The cuts that we have imposed during the 2017 budget year have been devastating,” said Senate Majority Leader Peter Wirth in a recent interview with the Santa Fe New Mexican. Wirth and other Democratic leaders are making it clear that they’re done with cutting government services.
As of Monday, the Governor’s stance on tax increases has not changed. Spokesperson Chris Sanchez said, “The Governor stands by her promise: she will not raise taxes. She does, however, support closing tax loopholes and modernizing the tax code.” There you have the opening gambits – the lines have been drawn in the sand. But, sand shifts and lines fade. If a budget deal is going to be reached by the end of the session, something will have to give.
There are many moving parts here both for comprehensive tax reform and for solvency for FY17. Here are some things that are on the table:
1. Sweeping comprehensive tax reform: HB 412 sponsored by Representative Jason Harper (R-Sandoval) and Senator John Arthur Smith (D-Dona Ana, Hidalgo, Luna and Sierra) and Carlos Cisneros (D-Los Alamos, Rio Arriba, Santa Fe and Taos) revamps the Gross Receipts Tax system by eliminating nearly all the exemptions, lowering the GRT rate, and lots more (more details on this bill are listed below if you are interested) The bill rebrands the Gross Receipts Tax as a Retail Sales Tax. The bill also addresses both personal and corporate income tax by establishing a 5% flat rate and subjecting online retail sales to the RTS (viewed as closing a loophole).
The goal in setting the new sales tax rate is to be relatively revenue neutral. Of course, the underlying issue is whether this bill can get the support it needs to stay alive in the session and ultimately be signed by the Governor. Or, will it gain no traction in the Legislature in favor of “tax increase proposals” designed to deal with solvency for FY18 only and no comprehensive tax reform in this Legislature? Speaking of those “tax increase proposals…”
2. The House Democrats laid out their plan for a solvency bill. The package has four items:
- Eliminating the exemption for paying GRT for nonprofit hospitals ($65M)
- Increasing the vehicle excise tax 1% ($49M)
- Raising permit fees on commercial trucks from $5.00 to $90.00 ($63M)
- Removing the exemption for online retail sales ($20M).
This package adds up to about $200M and is expected to be introduced this week and will be amended into HB202, which is the current bill for online retail sales.
3. Budget Solvency: A Second Look: Representative Harper suggested during the FY 17 budget solvency debate, converting this year’s capital outlay funds to general fund use. This swap is good for around $60 million and is such an obvious move; we wonder why it doesn’t get more traction. Let’s face it, $60 in capital outlay spread out across all legislative districts is going to have zero impact on building a more diverse economy. In addition, excess funds in the legislative retirement system could get many millions of dollars. These two proposals are worth a second look. They are relatively painless and don’t hit public schools or other high priority programs.
4. Right sizing government: New Mexico is on the high side of spending per capita when compared to our Southwestern neighbors. There are opportunities to look at consolidating some agencies and otherwise looking at overhead and administration to see where savings can be made. It’s hard to estimate the savings but several millions wouldn’t be out of the question. Consider a 1% reduction of a $5.9 billion budget is around $60 million. To a businessperson, that seems very doable, as cutting 1% from operating costs is pretty much a no-brainer. This is not to suggest an across the board cut but rather a strong prioritization of programs based on their effectiveness. Add this $60 million to it and the goal could be met without any other tax increases. We continue to believe that raising taxes in a weak economic environment is counterproductive at this stage of the session and we must look to restructuring and finding greater efficiencies first.
As you can see, there are no easy answers. Policy makers are struggling to balance all the interests competing for budget dollars while trying to balance the budget and build back a reasonable reserve. There are wide philosophical differences and deeply held beliefs that are also in play. It may be difficult to reach consensus (code for a Special Session).
More on HB 412 sponsored by Representative Jason Harper (R-Sandoval), Senator John Arthur Smith (D- Dona Ana, Hidalgo, Luna and Sierra), and Senator Carlos Cisneros (D-Los Alamos, Rio Arriba, Santa Fe and Taos) will be heard in House Taxation and Revenue Committee tomorrow. The bill is almost 350 pages. Representative Harper prepared the following white paper, which provides an excellent summary of what the bill does. The vast majority of this bill, the Chamber can support, but there are some things that we are uncomfortable with but that’s usually the definition of a good bill.
2017 New Mexico Tax Reform Act
Background and Objective
Representative Jason Harper (R-Sandoval)
The purpose of this reform is to solve substantial problems in the New Mexico Gross Receipts Tax (GRT) structure. The NM GRT is routinely rated as one of the worst state consumption taxes in the nation by respected national tax policy groups . These low ratings are attributed to: i) significant erosion of the base (great increase in the number of exemptions, deductions, credits), ii) taxation of every step of production (pyramiding), iii) significant increases in the tax rate from the original 2% (compounding the pyramiding problem), iv) complexity and challenges with compliance (e.g. Non-Taxable Taxation Certificate complexity), v) recent removal of consumption and other revenue that adjusts with inflation from the base, vi) unusual structure compared to nearly all other states (e.g. the term ‘GRT’ scares away businesses considering relocation to NM), and vii) lack of transparency.
The NM GRT is a hybrid of a true GRT and a true Retail Sales Tax (RST). An objective analysis of NM GRT concludes that this hybrid comprises the worst attributes of a true GRT, and the worst attributes of a RST .
The objective of this reform is to create a new hybrid that contains the best attributes of a true GRT, and the best attributes of a true RST. This will result in a new consumption tax structure that complements the modern economy, and is well equipped to handle future economic changes. This reform will also improve stability of revenues, restore uniformity and fairness of the tax, simplify administration and compliance, increase transparency, broaden the base, and lower all rates.
1. “Facts & Figures 2016: How Does Your State Compare,” Tax Foundation. NM Sales Tax ranked 48th in the State Business Climate Index; NM Sales Tax ranked the 7th highest sales tax collection per capita.
2. “Reforming the Gross Receipts” Helen Hecht, Tax Counsel, Federation of Tax Administrators and Richard Anklam, Executive Director, New Mexico Tax Research Institute. Presentation to the Revenue Stabilization and Tax Policy Committee, 2013.
Summary of Tax Code Changes Gross Receipts Tax (GRT)
- Broadening the tax base by removing nearly all exemptions, deductions, and credits:
- Significantly lowers state and local tax rates
- Improves uniformity
- Improves stability of revenue and restores revenue streams that grow with inflation
- Removes the most egregious form of pyramiding (business-to-business professional services and inputs)
- Simplifies compliance and improves administration by reducing number of Non-Taxable Transaction Certificates (NTTCs)
- Increases fairness
- Provides for alternative evidence in the case of a missing NTTC during audit
- Levels the playing field for local brick and mortar businesses by taxing internet sales transactions
- Removing the non-profit exemption to GRT:
- Increases fairness and uniformity in the medical industry by treating non-profit and for-profit facilities the same
- Guards against future Federal Laboratory structure changes
- Improves transparency by correctly attributing the 1.225% municipal share of the state tax to the municipalities tax rate
- Provides flexibility to local governments by converting all county and municipal earmarks to general purpose
- Eliminates the need for Hold Harmless payments by re-imposing the sales tax on food and healthcare practitioners
- Re-brands GRT as ‘Sales Tax’
- Only three classes of exemptions, deductions and credits remain:
- Anti-pyramiding – consolidated and rolled into a new anti-pyramiding section
- Recent economic incentives that resulted in substantial investment in the state
- NM does not need the reputation of ‘giving a good deal and then pulling out the rug’
- Sunsets added to these remaining deductions and credits
- Federal preemption doctrine: the state is not allowed to impose a tax because federal law prohibits it
- Removes perverse incentive to purchase out of state by aligning with GRT (now sales tax) base, and requiring that the rate be the same as the sales tax rate (as opposed to lower which is currently the case)
Low-Income Comprehensive Tax Rebate (LICTR)
- Guards against regressivity of the new sales tax by updating and realigning distributions to the federal poverty level and the new sales tax rate
Supplemental Nutrition Assistance Program (SNAP)
- Guards against regressivity of the new sales tax by removing the sales tax on all food purchased by a qualified SNAP program recipient (including food purchased with non-SNAP dollars)
Liquor Excise Tax
- Distributes Liquor Excise Tax revenue to state and county DWI treatment and prevention programs (60%), drug court programs (10%), and to the state as a match for Medicaid expenditures (30%)
- When the Liquor Excise Tax was adopted, the liquor industry agreed to support it in exchange for the revenue being dedicated to specific programs but the state has been putting most of it in the General Fund; this makes good on the deal
Motor Vehicle Excise Tax (MVET)
- Addresses significant statewide road infrastructure problems by sending 30% ($42 mil) of MVET to the state road fund, and 30% to the local road fund, as has been done in the past; the remaining 40% will continue to go to the General Fund
Personal Income Tax (PIT)
- Provides for a single PIT bracket at 5%
Corporate Income Tax (CIT)
- Provides for a single CIT bracket, and aligns the CIT bracket with the top state personal income tax bracket (5%)
- This single 5% PIT and 5% CIT bracket structure is the same structure as used in Utah, which is consistently rated in the top 10 of state tax structures
- Increases fairness and uniformity by requiring market-based sourcing for intangibles, not just tangibles
Property Tax – Tax Lightning
- Removes the provision in state law that requires the assessed value of a property to immediately adjust to current and correct when a property changes ownership, resulting in significantly higher property tax (tax lightning)
- Removes the annual cap on property valuation increases which will allow yield control to work effectively
- Ensures low income families who have lived in a home for many years are not priced out of their home when values go up