Overview of New Mexico’s Tax Systemand Issues Before the 2009 Legislature

February 17, 2009Richard Anklam, Executive DirectorThomas Clifford, PhD, Research Director

Richard.Anklam@nmtri.org

NMTRI Principles of Good Tax Policy

N.M. Tax Research Institute is a non-profit, non-partisan member-supported organization dedicated to advancing the following principles

of good tax policy in New Mexico.• Adequacy

– Revenues should be sufficient to fund needed services

• Efficiency– Interference with the private economy should be minimized

• Equity– Taxpayers should be treated fairly

• Simplicity– Laws, regulations, forms and procedures should be as simple as possible

• Comprehensiveness– All taxes should be considered when evaluating the system

• Accountability– Exceptions should be rare and should be carefully evaluated and justified

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FY 2007 State & Local Tax Collections: $7.9 Billion

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General Sales Taxes41%

Selective Sales Taxes11%

Individual Income Taxes15%

Corporate Income Tax5%

Severance & Other Taxes14%

Property Taxes14%

• High reliance on general sales taxes• Low reliance on property taxes• High reliance on severance taxes• About half of selective sales taxes are road fund revenues.

FY 2007 Tax Revenue Distributions: $7.9 Billion

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State General Fund53%

Local Governments33%

State Road Fund5%

Severance Tax Bonding Fund6%

Other State Funds3%

• Just over half of all tax revenue goes to the state’s General Fund • Local governments receive about one-third of all tax collections. • The state road fund receives about 5%, and the Severance Tax Bonding Fund

about 6%.

Trends in Tax Collections

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FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 20070.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

GRT & Comp. PIT Property Tax Severance taxes

Perc

ent o

f Per

sona

l Inc

ome

• GRT has increased – primarily due to local tax rate increases • Property tax has increased due to assessed value growth• Income tax collections have decreased due to tax rate reductions. • Severance taxes increased sharply due to higher product prices.

Multistate Comparisons: FY 2002

• New Mexico’s state & local sector uses a relatively large proportion of total personal income. • N.M. relies heavily on sales tax, lightly on property tax and below average on Income tax.• Taxes imposed directly on businesses – rather than on households – are relatively high.

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Measure:

Rank:

NM as Percent of U.S.

Average: 1 State & local general revenue -- % of personal income 3rd 128% 2 State & local taxes as percent of personal income 9th 107% 3 Property taxes as a percent of personal income 46th 54% 4 Sales taxes as a percent of personal income 6th 142% 5 Income taxes as a percent of personal income 36th 82% 6 Motor fuels taxes as a percent of personal income 22nd 121% 7 Motor vehicle excise tax rate 37th 61% 8 Cigarette tax rate 20th 105% 9 State & local taxes on high-income families (2004) 30th 100% 10 State & local taxes in the largest city (2004) 31st 93% 11 State & local business taxes as a percent of gross state product* 11th 120% Source: Congressional Quarterly, State Fact Finder. Except *COST, Annual Business Tax Study excluding

severance taxes.

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New Mexico Gross Receipts Tax by Industry Group: FY 2007

Retail26%

Services43% Wholesale

5%

Manufacturing3%

Construction15%

Utilities4%

Other4%

• GRT base is much broader than retail sales• Hybrid between Retail Sales Tax (high rate) and Business Privilege Tax (broad

base)• Large parts of household consumption are exempt – food, medical services• Reducing the base puts upward pressure on rates

Pyramiding of the GRT

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• Deductions for Business-to-business transactions are limited to resale and targeted industry-specific deductions.

• Estimates of pyramided share of tax base range from 1/3 to 50% -- currently over $1 billion per year.

• Pyramiding creates inefficiency and inequity in the tax system:• In-state companies face higher overhead than out-of-state competitors• Small businesses – which have to purchase more of their inputs from

other firms – face higher overhead than large firms

Other GRT Issues

• Regressivity– NM’s heavy reliance on sales taxes increases regressivity of the system– Reliance on services, b-t-b taxation reduces regressivity– Food, medical deductions and Income tax credits reduce regressivity

• Base erosion due to remote commerce– Broad base makes GRT less vulnerable to base erosion– Statute limits the Compensating Tax, which otherwise would apply to

remote sales– NM could join the Streamlined Sales Tax Project to encourage remote

sellers to collect GRT

• Political base erosion– Narrower base, higher rates increase pyramiding

• Hold harmless provisions are increasing complexity and cost

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2008 Property Tax Revenue Collections: Total $1.39 billion

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• About 1/3 of revenue goes to schools, mostly for capital outlay• 1/4 goes to Counties, mostly for operating expenditures• About 1/6 goes to municipalities.• About 10% each goes to hospitals (primarily UNMH) and higher education and • Slightly less than 5% goes to the state for GO bonds

State County Operating

County Debt

Municipal Operating

Municipal Debt

School Operating

School Debt

Hospitals Higher Education

Other$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

$400.00

$450.00

$500.00

Mill

ion

Dol

lars

Growth of Property Tax Obligations Since 2000

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2001 2002 2003 2004 2005 2006 2007 2008 100

110

120

130

140

150

160

170

180

190

200

Residential Nonresidential Personal Income

Property Tax Year

20

00

Le

vel =

10

0

• Residential obligations have almost doubled – mainly due to assessed value growth.

• Residential obligations have increased by 1/3 more than personal income.• Non-residential obligations are consistent with personal income growth.

Property Tax: Key Issues

• Valuation limits create large disparities between taxpayers

• Value limits and yield control have not prevented residential liabilities from growing much faster than income– Tax rates have not adjusted downward despite rapidly rising values:– Yield control does not include new construction– Voters are given an “all or nothing” option, either approving the

amount of debt that can be financed by existing rates or none at all

• Uneven administration creates wide disparities

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Income Tax Issues

• Adequacy: – Progressive rates cause “bracket creep” so revenue grows more

quickly than income

• Re-distribution:– Progressive rates shift burden from poor to rich

• Efficiency– Recent rate decrease has brought rates into line with other states– Not yet clear how changes will affect revenue growth over time– Reduced progressivity is offset for low-income households by new tax

credits and exemptions

• Exemptions/Credits/Deductions:– Tax base is being eroded for non-tax policy goals– Threat to adequacy and efficiency

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Corporate Income Tax Issues

• A hard tax to justify:– Selective application – “C-corp.’s” only– Net income base is highly volatile– Incidence of tax burden is uncertain

• Current law is a mixed bag for taxpayers:– Cons: Tax rates are high, and other provisions increase taxable income– Pros: Election to file as a separate, consolidated or combined gives

taxpayers flexibility; Adhesion to federal tax base provides simplicity.

• Combined reporting requirement would increase complexity– Definition of “unitary” is uncertain, would lead to litigation– Revenue impacts are highly unpredictable– NM has already succeeded in blocking abusive transactions

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Road Fund Revenues

• NM DoT reports being pinched by high costs, lower federal funding and aggressive expansion

• NM and federal highway officials point out that revenues based on cents-per gallon fuels taxes and dollars-per-registration do not increase with inflation over time

• Local officials complain about poor compliance with taxes on commercial trucking

• Motor vehicle excise tax rate is relatively low, and revenue is distributed to General Fund – a 1% rate increase would generate $30 to $40 million

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Taxes and Economic Development

• Most economists agree that taxes negatively affect state economic development • NM’s GRT on business purchases puts the state at a disadvantage, even after

allowing for low property taxes

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Nevada

Colorado

Oklahoma

Utah

Oregon

Californ

ia

New Mexic

oTexa

s

Arizona

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Effective Tax Rates: Seven Industry Average

SalesPropertyIncome

Perc

ent

of P

re-t

ax R

ate

of R

etur

n

Tax Incentives

• Pros: – Incentives can offset other problems for firms seeking to locate here– Targeting can hold down cost, maximize “bang for the buck”

• Cons:– Inequity creates tension between new and existing businesses– State-to-state tax differences are probably too small to have a major impact– Economic models can’t tell who really benefits – firm owners, workers, landowners or

consumers– Can never know for certain the answer to the “but for” question

• Non-economic development incentives:– How much subsidy is the right amount?– Tax Dept. cannot provide follow up, accountability– Increased complexity and cost– Direct appropriations are easier to track and make accountable

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Revenue Raisers

• GRT rate is too high given the breadth of the tax base – should also avoid “minimum tax” based on firms’ gross revenue

• Oil and gas taxes are high enough – as a gross revenue tax, imposes a higher burden on the rate of return when prices decline

• Eliminating state & local tax deduction for income tax purposes will increase complexity, increase disparities between NM and other states

• Corporate income tax combined reporting is highly unpredictable• Cigarette taxes will not reduce consumption as long as tribal and internet

sales are tax free -- revenue gain is much smaller than otherwise• Motor vehicle excise tax and insurance premiums tax rates are relatively

low compared to other taxes – revenue would be more predictable• Re-visit more recently enacted tax preferences (review

credits/exemptions/deductions for necessity )• Streamlined Sales Tax Project will bolster the GRT in the long run

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