The document discusses New Mexico's economic environment and recent tax law changes. It notes that the state is facing a large budget shortfall and outlines various tax proposals under consideration to address it, including increases to personal income, gross receipts, cigarette, gasoline and oil/gas taxes. It also discusses proposals regarding business incentives and property tax valuation limitations.
1. New M i ’ Economic and Fi l
N Mexico’s E i d Fiscal
Environment, Recent Tax Law Changes,
&
Recent Dialogue, Likelihood, and
Expected New T P
E d N Tax Proposals l
Presented to the Association of Counties’ Board of Directors
January 18, 2011
RICHARD L. ANKLAM, PRESIDENT & EXECUTIVE
DIRECTOR
2. NMTRI Principles of Good Tax Policy
2
N.M. Tax Research Institute is a non-profit, non-partisan member-
p f , p
supported organization dedicated to advancing the following principles
of good tax policy in New Mexico:
Adequacy
Revenues
Re enues should be sufficient to fund needed services
ser ices
Efficiency
Interference with the private economy should be minimized
Equity
q y
Taxpayers should be treated fairly
Simplicity
Laws, regulations, forms and procedures should be as simple as possible
Comprehensiveness
C h i
All taxes should be considered when evaluating the system
Accountability
Exceptions should be rare and should be carefully evaluated and justified
N.M. Tax Research Institute
3. Economic Environment
3
FY 2007 State Tax Revenues
Gross Receipts Tax 35% Insurance Premiums Tax 2%
Other Taxes 5% Personal Income Tax 30%
Property Taxes 1% Severance Taxes 16%
Tobacco Taxes 1% Corporate Income Tax 5%
Fuel Taxes 5%
N.M. Tax Research Institute
4. Economic Environment
4
FY 2007 New Mexico
Municipal Tax Revenues
Gross Receipts Tax 80% Property Tax 12%
Cigarette Tax 1% Gasoline Tax 1%
Lodgers T 1%
L d Tax Franchise T 3%
F hi Tax
N.M. Tax Research Institute
5. Economic Environment
5
FY 2007 New Mexico
County Tax Revenues
Property Tax 55% Cigarette Tax 0%
Gasoline Tax 1% Lodgers Tax 0%
Motor Vehicle Excise Tax 1% Franchise Tax 5%
Gross Receipts T 43%
G R i t Tax
N.M. Tax Research Institute
6. Economic Environment
6
REVENUE FOREAST - NOT PRETTY
Shortfall could still get worse (although recent
forecast improved)
Federal stimulus money going away
Governor released worst numbers than the
“consensus”
Differing assumptions (i.e. Guv didn’t assume
continuation of austerity measures)
Medicaid is biggest question
N.M. Tax Research Institute
7. Economic Environment
7
Source: December 2010 Consensus Revenue Forecast
N.M. Tax Research Institute
8. Economic Environment
8
Source: December 2010 Consensus Revenue Forecast
N.M. Tax Research Institute
9. Economic Environment
9
Source: December 2010 Consensus Revenue Forecast
N.M. Tax Research Institute
10. Economic Environment
10
Source: December 2010 Consensus Revenue Forecast
N.M. Tax Research Institute
11. Economic Environment
11
Source: December 2010 Consensus Revenue Forecast
N.M. Tax Research Institute
12. Economic Environment
12
Source: December 2010 Consensus Revenue Forecast
N.M. Tax Research Institute
13. Economic Environment
13
Annual Growth Rates by Revenue
30.0%
20.0%
10.0%
10 0%
Gross receipts tax
0.0%
Personal income tax
-10.0% Corporate income tax
-20.0% Energy-related revenues
-30.0%
-40.0%
4
FY10 FY11 FY12 FY13 FY14
Source: July 2010 Consensus Revenue forecast.
•All revenues fell in FY10, O&G revenue fell sharply
•Strong recovery expected for CIT O&G
Strong CIT,
•Moderate growth in PIT, GRT, Other Sales Tax
N.M. Tax Research Institute
14. Economic Environment
14
Oil & Gas Production Trends
110.00%
%
105.00%
100.00%
95.00%
2000 = 100%
90.00%
85.00%
80.00%
75.00%
70.00%
65.00%
60.00%
60 00%
0
1
2
3
4
5
6
7
8
9
0
0
0
0
0
0
0
0
0
0
n-
n-
n-
n-
n-
n-
n-
n-
n-
n-
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Source: ONGARD system
•Gas production decline accelerated in the last 2 years
Gas prod ction ears
•Partly due to more liquids processing
•Oil production appears more stable
N.M. Tax Research Institute
15. Economic Environment- Rate Growth and
Pyramiding
15
8.5%
8.0%
Albuquerque
7.5%
Las Cruces
Farmington
7.0%
Santa Fe
Rio Rancho
6.5%
Roswell
Alamagordo
6.0% Clovis
Hobbs
5.5%
5.0%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
N.M. Tax Research Institute
16. Economic Environment- Rate Growth and
Pyramiding
16
What is pyramiding?
Pyramiding is when a general consumption or transaction tax
(like a sales tax or the NM gross receipts tax) is charged on
business inputs (business to business sales) and becomes
(business-to-business
embedded as part of the cost of the ultimate goods or services
sold to the consumer.
GRT is also regressive (hit’s poorer households harder relative
(hit s
to income
State, muni’s, counties and others in competition for
tax base
Counties increasingly dependent on GRT – some now
receiving more revenue from GRT than property tax.
tax
N.M. Tax Research Institute
17. Political Environment
17
Broadening discussion of budget cuts and tax
increases
Shortfall too lengthy for “kick the can” strategies
alone
Social advocacy groups, religious groups and unions
calling for more business and income taxes, less
taxes
budget cuts
Business advocacy and others calling for g
y g greater
focus on gov’t spending reductions and no tax
increases targeting business
N.M. Tax Research Institute
18. Political Environment
18
Most agree cuts are still necessary
Many feel tax increases may be necessary or
inevitable
Governor Martinez and her opponent has promised
to not raise taxes or cut education OR Medicaid
(NOT GOING TO WORK OUT THAT WAY)
Debate: If taxes are to be raised, which taxes and
how much? (similar questions on expenditure side)
h h? ( i il ti dit id )
N.M. Tax Research Institute
19. Tax Policy Issues
19
Taxes are necessary in that they pay for public
services, but:
Taxes can cause economic distortions, inefficiencies, and
inequities
i ii
Economic implications of different tax increase proposals
vary
y
The state needs to minimize negative impact of increased
taxes on job creation as well as impacts on the most
vulnerable
N.M. Tax Research Institute
20. Tax Proposals
20
Include most significant tax programs
Are often “retreads” of previous proposals
Don t
Don’t represent the only options
Endless options/”variations on a theme” possible
Some options from blue ribbon tax reform
commission and Guv’s budget balancing committee
Include compliance enhancement p p
p proposals that
don’t “raise taxes”
Use terms like “loophole” to avoid “increasing taxes”
N.M. Tax Research Institute
21. Passed Tax Proposals – Regular Session 2010
21
Tax Credits and Other Measures
Las Cruces Tax Increment Project (HB 112)
Transport of Dairy Waste for Gas Tax Credit (HB 171)
Business Retention Gross Tax & Gaming Tax (HB 203)
Withholding Tax Changes (PTE/O&G) (HB 120)
Solar & Wind Energy Equipment Gross Receipts (HB
261)
Economic D l
E i Development T I
t Tax Incentive Ch
ti Changes (SB 47) )
Affordable Housing Tax Credit Use & Vouchers (SB 144)
County Gross Receipts for Certain Projects (SB 162)
N.M. Tax Research Institute
22. Passed Tax Proposals – SS 2010
22
Senate Finance Committee Substitute for Senate Bill 10,
12 & 13 – non-vetoed portions:
increased the statewide gross receipts and compensating tax
rates by one-eighth p
g percent ( / 7/ / ),
(a/o 7/1/10),
required the “add-back” of state income and sales taxes itemized
and deducted on federal returns for state income tax purposes
( /
(a/o tax year 2010), and
y ),
closed a “hole” in the compensating tax.
VETOED - food and LICTR Related Provisions
The total general fund revenue generated by the bills is
approximately $137.5 million in FY11, and $122.5 million in FY12
post veto (previously $200 million).
N.M. Tax Research Institute
23. Passed Tax Proposals – SS 2010
23
House Taxation and Revenue Committee
Substitute for House Bill 3 - non-vetoed portions:
Increased cigarette tax by 75 cents
Changes distributions to hold some beneficiaries harmless
VETOED – existing distributions to local governments and
new distributions
ne distrib tions to the PED for earl childhood ed cation
early education
and CYFD for early childhood programs
The total general fund revenue g
g generated by the bill is
y
approximately $33.9 million post veto, (previously $22.5
million).
N.M. Tax Research Institute
24. Tax Proposals-Personal Income Tax
24
“Roll Back Richardson Tax Cuts” – PIT
Roll Cuts
We raised personal income taxes this year already
Tax rate “surcharge” at varying income levels
g y g
NM rates similar to surrounding states currently
Reduce capital gain tax preference (PIT)
NM more generous than most states assuming current rate
structure
Impose mandatory combined reporting
p y p g
New Mexico has long allowed three options for reporting
corporate income as an economic development incentive. NM
currently imposes highest rates and least favorable reporting rules
y p g b p g
relative to surrounding states, (except for filing group elections)
N.M. Tax Research Institute
25. Tax Proposals - Gross Receipts Tax
25
Increase GRT rates
Already increased GRT and Compensating Tax by 1/8%
Negative Consequences to business and poor alike
Eliminate or alter “hold harmless” provisions
Repeal or alter “food tax” deduction
p
Candy & soda
Provision passed and vetoed this year
Other?
h
N.M. Tax Research Institute
26. Tax Proposals - Gross Receipts Tax
26
Increase GRT rates
Already increased GRT and Compensating Tax by 1/8%
Negative Consequences to business and poor alike
Eliminate or alter “hold harmless” provisions
Repeal or alter “food tax” deduction
p
Candy & soda
Provision passed and vetoed this year
Other?
h
N.M. Tax Research Institute
27. Other Taxes
27
Oil and gas taxes
“Equalize” oil and gas tax rates
Progressive rate structure
Impose higher “sin” taxes
Alcohol?
Already i d i
Al d raised cigarettes 75 cents/pack
/ k
Increase gasoline taxes
Tax currently goes to road fund
N.M. Tax Research Institute
28. Other Taxes
28
Motor hi l
M t vehicle excise t
i tax
NM low at 3% with little ED implication
Turnover tax so rate should be less than GRT
Sector still in downturn.
Insurance premiums tax
Increase health premiums 1%
Many health services now out of GRT base
Retaliatory taxes
N.M. Tax Research Institute
29. Other Taxes – Property Tax
29
Valuation Limitation
Populist initiative
Unintended consequences – “Tax Lightning”
2 District Court taxpayer wins (
p y (Bernalillo County) on appeal
y) pp
Decision on appeal not expected soon
Related issues - multi-family dwelling classification
“Fixes”
Good time to fix in downturn;
Current and correct is best policy, BUT
Winners and Losers likely result from any “fix”
y y
Political Environment odd
Speaker Lujan appearsinvested in current law
Not a General Fund issue in the midst of GF budget crisis
Proposal to reduce mill levy for UNMH
N.M. Tax Research Institute
30. Business Incentives
30
• Always scrutinized
• In total cost under $94M, down from over $120M
• Many used little and repeal offers little savings
• Utilized incentives enjoy support
• New sunsets and clawbacks possible as are caps
possible, caps,
benefits reduction, and repeal
Note: Film Credit more costly than all other business
incentives combined and represent approx. 70% of
expenditures on business tax credits
N.M. Tax Research Institute
31. Business Incentives
31
Film credit
$76M in 2009; $65M in 2010
High wage jobs tax credit
$14M in 2009; $4.6M in 2010
Technology jobs tax credit
$6M in 2009; $6M i 2010
i in
Renewable energy production tax credit
$15M in 2008; 0 in 2009
Investment credit
$11M in 2009; $7M in 2010
N.M. Tax Research Institute
32. Non-Tax Revenue Enhancement Proposals
32
Varying means of converting capital money to
general fund operating funds
Rate swap OGEST with Severance
“Sponge” bonds
Trade capital for operating (pork=construction)
Permanent endowment funds
Already paying out more than taking in; lost over $1
billion in the last quarter
Requires Constitutional Change
Alternative – Sell Note to P-Funds as “Investment”
Essentially borrowing money from future
N.M. Tax Research Institute
33. Summary
33
Revenue/budget situation uncertain but remains
bleak
Taxes increase proposals have been introduced
Taxes increases of some sort are likely (although
they may not be called that)
How you tax matters – do the least harm
o a a e s e eas a
Property Tax Lightning may get addressed
N.M. Tax Research Institute