Diversify New Mexico’s Economy Using Oil/Gas Surplus

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Recently, it was announced that despite repeated attacks by the Biden administration, New Mexico’s oil and gas industry had a record year. It generated 35% of all general-fund revenue for the state budget in FY 2021 (which ended in June) – a share exceeded only once in the most recent eight-year period.

In raw numbers, the industry generated almost $5.3 billion in revenue for state and local governments in the 2021 fiscal year. In other words, the industry that New Mexico has long (over) relied on and the “progressive” wing of the Democratic Party, in particular, would like to eliminate entirely, continues to prop up the State economy and budget.

Ironically, the massive oil-and-gas-generated budget surplus available to legislators this January is also the ticket to the diversified economy that everyone of both political parties realizes New Mexico must have.

And, while we support ANY effort to lower tax burdens on New Mexicans, Gov. Lujan Grisham’s plan for a small .25 percentage point reduction in the State’s Gross Receipts Tax (GRT) is inadequate. After many years of failed attempts and with a big surplus available, it is time to really reform the GRT.

Currently, the City of Las Cruces GRT is 8.3125%, Albuquerque is at 7.875%, while Santa Fe is 8.44%. Rates across the State of New Mexico are charged at similar rates but up to 9 percent. For a variety of reasons rates across the state have risen dramatically over the last 10-15 years. But high and rising tax rates are only part of the problem.

The real problem with the GRT is it’s unfair treatment of small businesses. Accountants, bookkeepers, even medical professionals, and attorneys (and many others) all must charge this tax on top of the cost of their services. Alternatively, service providers located in other states do not have to charge the GRT. This makes New Mexico especially unattractive as a location for small businesses. And it is those small businesses that grow into tomorrow’s big businesses which can employ hundreds or even thousands of workers and boost state and local economies. 

With the Legislature expected to convene in January with a massive surplus generated primarily from oil and gas, now is the time to focus on fundamental reform. According to the governor, her proposed GRT cut will reduce revenues by $145 million annually. That’s a tiny fraction of the surplus. At a bare minimum proper GRT reform needs to eliminate the taxation of these business services. It will be easier to make the change when there is plenty of revenue available.

The GRT and much-needed reforms to it are not a partisan issue. Republican Jason Harper has introduced reform legislation in recent years with former Senate Finance Committee chair, Democrat John Arthur Smith. More recently, powerful House Appropriations Committee Chair Democrat Rep. Patty Lundstrom told attendees of the New Mexico Oil and Gas Association (NMOGA) conference in October that “tax pyramiding” needed to be addressed by the Legislature in the upcoming session.

While taxing services is the fundamental problem with the GRT, there are others. Specifically, while the tax was originally conceived as being applied at VERY low rates and broadly, the political process has led to the current, sorry state of high rate, exemption-filled tax structure.

Special interests line up in Santa Fe to lobby for exemptions and deductions for their business or industry and the Legislature is more than happy to offer those exemptions. And, whether you support taxing groceries or not, the process of eliminating that tax has directly contributed to the massive rise in GRT rates in recent years.

In addition to addressing taxes on business inputs and services, the Legislature needs to put a stop to the special exemptions while also constraining the future ability of local governments to raise rates.

If New Mexico Democrats are serious about “diversifying” New Mexico’s economy away from over-dependence on oil and gas, using that revenue as a proverbial “backstop” to transition the GRT into something less anti-business and more resembling a sales tax, this is the time.

Paul Gessing is 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 views or opinions of New Mexico In Depth.

2 thoughts on “Diversify New Mexico’s Economy Using Oil/Gas Surplus

  1. If Paul Gessing is suggesting tax reform you can be assured that ultimately it will only help the one-percenters. Yes, I am all for reforming the GRT. It is inhumanely regressive. Let’s replace the revenues with a real progressive income tax that does not allow the rich to get away with zero tax bills because of loopholes.

  2. The writer claims that the gross receipts tax is “not a partisan issue.” On the contrary, state tax revenue shortfalls resulting from radically-reduced income tax obligations of NM corporations and the top 1% of New Mexicans causes these burdens to be shifted to the poor and middle class via the GRT. This shift is a direct consequence of political donations and other efforts by Republican party activists and their issue cover groups such as the Rio Grande Foundation. One way of reducing the tax burden on New Mexicans would be for political front groups like the RGF to stop using the fraudulent “non-partisan” cover and pay their fair share of taxes as political organizations.

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