Are Legislative Leaders Willing to Forego Tax Reform and $100 million in revenue?

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The Rio Grande Foundation is undoubtedly among the strongest supporters of limited government in New Mexico. As a general rule we don’t support increasing government revenues as an end in itself. Our philosophy (based on reams of data and international comparison) is that resources would be better spent by individuals, not government bureaucrats and politicians.

That said, the New Mexico Legislature, by not embracing tax reform during the 2018 session, seems to be willing to forego a chance to both secure upwards of $100 million for the state AND achieve an important public policy reform for New Mexico.

Rather than embracing long-overdue reform of the gross receipts tax (GRT), New Mexico’s Democratic legislative leaders have clearly signaled that they are willing to let petty partisan differences with Governor Martinez stand in the way.

Rep. Jason Harper’s tax reform proposal has generated bipartisan support and legislative appropriation of $400,000 for a study (by Ernst & Young). The basic idea of Harper’s plan is to lower gross receipts tax rates while filling in loopholes and removing certain exemptions like that on purchases made by non-profits.

How could revenue-neutral tax reform save $100 million or more for New Mexico?

Los Alamos National Labs (LANL) is managed by a consortium led by the for-profit Bechtel. Under New Mexico’s gross receipts tax, LANL has generated as much as $128 million in total gross receipts taxes in a single year.

The contract to manage LANL is up for renewal in 2018 and several universities including the University of Texas system are bidding for the contract. Under current New Mexico tax law, if a non-profit were to manage LANL, the state would be unable to tax much of the lab’s activity and thus lose $100 million plus annually.

The fact that New Mexico, uniquely among U.S. states, can tax Washington is perhaps the only redeeming characteristic of the gross receipts tax. If it can’t do that, we might as well get rid of the GRT entirely.

The GRT is a singularly problematic tax as it hits small businesses and entrepreneurs the hardest. Specifically, service providers that contract with other businesses or individuals (as opposed to being hired by them as an employee) face an additional tax burden of 7.5 percent in Albuquerque and similar rates throughout the state. That burden is not imposed by other states.

So, when the Rio Grande Foundation’s web services provider moved to Colorado Springs from Albuquerque a few years back his company no longer had to charge GRT. This saved us hundreds of dollars a year. Spread those decisions and charges out over the entire economy and there can be no doubt that New Mexico’s GRT in its current form is a massive killer of jobs and small businesses in our state.

The GRT is a leading contributor to New Mexico’s economy remaining among the weakest in the entire nation. Despite a rebound in the oil patch and a few hundred million dollars in “new” money being available, New Mexico is definitely not “out of the woods” yet. Notably, general fund spending remains well below its Richardson-era peak of a decade ago.

The wants are many. Several major budget increases have already been put forth:

· An unexpected $50 million for the RailRunner’s positive train control;
· An additional $15.4 million for the judiciary;
· Another $84 million for Medicaid;
· An extra $600,000 for the Spaceport;

This is just the beginning. Both education and police will want to see funding restored or added.

In an August 2017 opinion piece, LFC Chair Patty Lundstrom noted with some degree of pride that Democrats had proposed $426 million worth of tax hikes (revenue enhancements as she put it) during the 2017 session. You can bet that if a Democrat follows Governor Martinez into the Governor’s mansion, these tax hikes will be put on the fast-track.

Before the Legislature raises taxes on the rest of us, it needs to make sure existing revenues are protected. This could still be done by moving forward seriously and methodically with revenue-neutral tax reform that preserves those revenues now and into the future while also reducing rates and pyramiding.

Paul Gessing is the president of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility. The views in this column are the author’s alone and do not reflect the view or opinions of New Mexico In Depth.

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