A joint, six member House-Senate conference committee came to agreement on an omnibus tax package late Friday evening, and the Senate stayed late into the night to adopt the agreement on a vote of 33-9. The House acted on the measure at around 8:00 am Saturday, ahead of a noon adjournment of the session, and, by voice vote, accepted the conference report. The agreement received strong bipartisan support – even though there are things to love and things to hate – a sure sign of a compromise.
A number of items in the tax package align with what the Chamber has been advocating this session.
First, there are no personal income tax increases contained in the bill (a previous version created two new top tax rates), and many low- and middle-income families and small businesses will receive an income tax reduction (in all, the bill lowers income taxes by about $140 million). Credits for low-income working families and the state’s new child tax credit are increased to help people cope with rising inflation.
Second, gross receipts taxes will be reduced by one-half of a percentage point, spread out over four years. While not as much – or as soon – as we would have liked, this reflects a multi-year commitment by the State to keep drawing down our gross receipts tax rate over time. Remember: based on legislation passed last session, the GRT rate will already decline by 1/8 percentage point this summer, when the first of the four new rate declines will also take effect.
In addition to the overall GRT rate reduction, the gross receipts tax will NO LONGER BE APPLIED to the payment of medical deductibles and copays. This is a major victory in our efforts to make New Mexico more hospitable to health care practitioners – especially physicians. Currently, doctors cannot recover the GRT applied to copays and deductibles, so it ends up acting like a surcharge on this economic activity. Removing the tax will apply to – and benefit – a wide variety of health care providers throughout New Mexico. We’ve been advocating for several measures that will help keep health care professionals in our state, and this is an important contribution.
Third, the tax rebates of $500 for single filers and $1,000 for joint filers remains in place.
Fourth, the capital gains deduction is enhanced from an earlier version, permitting a 40% deduction on the sale of a New Mexico business up to $1 million in gain. We have strongly resisted the idea of a lower capital gains deduction, especially because small businesses represent a lifetime of work and are often the retirement nest eggs for business owners. The bad news here, though, is that the deduction for any other type of capital gain is capped at $2,500, down from 40% of any gain. We think this is shortsighted as we should be encouraging saving and investment on all fronts.
Fifth, a flat 5.9% corporate income tax rate is established, and here’s the really good news: every registered corporation in New Mexico will now use the single sales factor method of income apportionment. This is a very important step in encouraging companies to expand their headcount and facilities in New Mexico – as opposed to elsewhere, whereas the traditional 3-factor method of apportionment actually penalizes expansion in our state. Telecom companies may continue to use the three factor method, if they choose, for at least the next five years.
Sixth, on a phased in basis, motor vehicle excise tax revenues will be distributed to the road fund rather than the general fund. This is a huge improvement as the road fund has been shortchanged over the years. The diversion of the excise taxes began in the really lean years when every penny was scraped up to balance the budget. Now, with all the excess revenue, it’s time to put these revenues back to work building and improving roads – goodness knows that’s a priority for our state.
A very tall hurdle to overcome in the conference committee was the amount of film tax credits proposed by the Governor and added to the package late in the game in the Senate. The goal of the Economic Development Department’s film office is to attract production of large, multi-year TV series from “film partners” such as Netflix and others, which have committed to stay in the state for 10 years and are making significant investments in studios and the training of New Mexico workers. The compromise agreed upon increases the cap of $5 million in tax credits per production to $15 million, with a total annual cap of $40 million which will sunset in 5 years. Additionally, the “uplift” credit for producing films in rural areas is increased from 5% of production costs to 10%, and the defining point for “rural” is changed to 60 miles from a county’s city center from 60 miles from the county border, which ruled out too many actual rural areas.
The amount of liquor and tobacco tax increases was also at issue, with lower increases tracking more closely to the House proposals being adopted. Also included in the tax package are deductions for teachers purchasing classroom materials from their own pockets; lifting of a sunset on the veteran pension exemption; expansion of the rural health care provider tax credit; electric vehicle and charging unit tax credits; GRT deduction for child care providers; GRT deduction for medical home safety equipment; and increase to $1,500 for adoption of a special needs child; tax credits for geothermal electricity and use of ground-coupled heat pumps; and, dyed diesel GRT exemption.
Though we feel the PIT and GRT relief could – and should – be more aggressive, this tax package brings many positive benefits to New Mexico families and businesses. And, we are pleased that – with limited exceptions – lawmakers recognized that raising taxes is an unwise and unnecessary move, especially with billions of dollars in excess revenue.