New Mexico tax policy: Here's what experts are saying needs to change

Correction: This version correctly attributes quotes to Amber Wallin. A previous version incorrectly attributed the quotes to Paige Knight. Both are with New Mexico Voices for Children.

LAS CRUCES — A new study of New Mexico’s tax policy found that many of the problems in our tax system today are the result of changes made during past administrations.

Randall Bauer of the Philadelphia firm PFM Group Consulting conducted the study and presented its findings to the New Mexico Legislature’s Revenue Stabilization and Tax Policy Committee on Tuesday, Dec. 15.

He cited prior national studies by the Pew Research Center that found New Mexico has one of the six most volatile tax structures in the country. Four of those six states are reliant on energy production.

And New Mexico is also one of six states that has not yet fully recovered from the recession of 2007-08. That has only been made worse by the pandemic, he said.

“You have an industry concentration in oil and gas, and also issues with education and poverty. There are some headwinds,” Bauer said. “But there are also advantages. This is a beautiful state with a lot of natural resources. But you need to take a look at your tax structure.”

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He said New Mexico’s tax structure is far too reliant on gross receipts taxes and oil and gas extraction taxes and royalties.

And changes by past administrations have done more harm than good, starting with an income tax bill passed under Gov. Bill Richardson in 2003 that dropped the top rate from 8.2 percent to 4.9 percent and increased the deduction on capital gains taxes by 50 percent.

“That may well be the largest reduction in the top rate of any state in the country, and it’s had a significant hollowing-out effect,” Bauer said.

Recommended changes

These were recommendations from the study that Bauer highlighted at the meeting:

• Reinstate the personal income tax rates that were in place before the Richardson tax cut.
• Restructure the GRT food tax exemption to be a refundable tax credit.
• Increase the fuel tax.
• Evaluate the effectiveness of business tax incentives.
• Consider an increase in property taxes to offset a decrease in the GRT.
• Have a tax structure in place for when sales of recreational marijuana are legalized.

Bauer said that, along with raising the top rate on personal income taxes, the state should consider eliminating the capital gains tax deduction and creating its own estate tax. Those taxes would be paid by the wealthiest people in the state, he said.

Repeal of the food tax also dates back to the Richardson administration. Bauer said refundable tax credits are a better way to target assistance to the poor. He said the state already has a system in place to distribute those credits.

“You can deal with it with tax credits and still collect from those who are buying steak and lobster,” he said.

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New Mexico’s GRT allows the state to collect taxes on private contracts with the federal government, which cannot be collected under the traditional sales tax system used in most states, Bauer said. But, he said, any consumption tax is regressive by its nature, and New Mexico is far too reliant on GRT revenue. He said shifting some of the burden to property taxes would create a more stable revenue source.

“I understand there are historic concerns about property taxes, but there are ways to deal with low-income individuals with a lot of property,” he said.

Senate Majority Leader Peter Wirth, D-Santa Fe, said the GRT was groundbreaking when New Mexico lawmakers came up with the idea 50 years ago, but now the base has become too narrow and the rates too high. And, businesses face a problem of pyramiding, where one tax is layered on top of another

“We do have to do this, because otherwise we end up with a system with rates that are really unfair,” he said. “This gives us a menu of options to look at.” Rep. Rod Montoya, R-Farmington, said he was concerned that tax reform would actually mean tax hikes.

“If we take an economy that is not growing and try to rely less on oil and gas, it means increasing taxes on people living in New Mexico,” said Montoya, the House minority whip. “I’m very concerned that what’s going to happen is there’s going to be a high likelihood of raising revenue, which means raising taxes.”

Voices for Children

Amber Wallin and Paige Knight of the group New Mexico Voices for Children argued that the state needs changes to its tax system that will help those earning the least and ensure there are adequate resources to address people’s needs.

“We believe good fiscal policy includes ensuring how the government can pay for its obligations to the people who they govern,” Wallin said.

She said the state responded to the recession during the Susana Martinez administration by cutting taxes for corporations and cutting services for families. Those tax cuts did not produce the economic growth that was promised, she said.

“We had to starve programs that help families, and as a result we dropped to last in the nation in child well-being,” Wallin said, referring to the annual Kids Count survey, which is administered in New Mexico by Voices for Children, a nonpartisan nonprofit founded in 1987.

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Their top recommendation was to restore income tax rates to the level they were before the cuts of 2003. Those cuts have cost the state $500 million a year, and have gone disproportionately to those with the highest incomes, Wallin said. A family earning $25,000 a year now pays the same rate as one earning $250,000, she said.

Other suggestions by Voices for Children included:

• Creating a New Mexico working families tax credit based on the federal earned income tax credit. One in four tax filers in the state already gets the federal credit, and 90 percent of those benefits go to families with kids, Knight said.
• Increasing the low-income comprehensive tax rebate. This rebate is available to very low-income taxpayers, and was originally designed to offset the regressivity in GRT, Knight said. She said funding for the program has decreased every year.

Wallin also suggested raising taxes on corporations doing business in New Mexico, and on alcohol sales, tobacco sales, the motor vehicle excise tax and health insurance premiums as possible options.

She said that, despite all the tax breaks targeted to businesses and high earners, New Mexico still has the slowest job growth in the nation.

“We can’t go down that road again,” she said.

Walter Rubel can be reached at waltrubel@gmail.com.