New Mexico Budget Situation

N M i ’ E i d Fi l New Mexico’s Economic and Fiscal Environment, Recent Tax Law Changes,

&&Recent Dialogue, Likelihood, and

E d N T P l

J a n u a r y 1 8 , 2 0 1 1

Expected New Tax ProposalsPresented to the Association of Counties’ Board of Directors

y ,R I C H A R D L . A N K L A M , P R E S I D E N T & E X E C U T I V E

D I R E C T O R

NMTRI Principles of Good Tax Policy2

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

of good tax policy in New Mexico:Adequacy

Re enues should be sufficient to fund needed ser icesRevenues should be sufficient to fund needed services

EfficiencyInterference with the private economy should be minimized

Equityq yTaxpayers should be treated fairly

SimplicityLaws, regulations, forms and procedures should be as simple as possible

C h iComprehensivenessAll taxes should be considered when evaluating the system

AccountabilityExceptions should be rare and should be carefully evaluated and justified

N.M. Tax Research Institute

Exceptions should be rare and should be carefully evaluated and justified

Economic Environment3

FY 2007 State Tax RevenuesFY 2007 State Tax Revenues

Gross Receipts Tax 35% Insurance Premiums Tax 2%Other Taxes 5% Personal Income Tax 30%Other Taxes 5% Personal Income Tax 30%Property Taxes 1% Severance Taxes 16%Tobacco Taxes 1% Corporate Income Tax 5%Fuel Taxes 5%


Fuel Taxes 5%


FY 2007 New MexicoMunicipal Tax Revenues

Gross Receipts Tax 80% Property Tax 12%

Cigarette Tax 1% Gasoline Tax 1%

L d T 1% F hi T 3%


Lodgers Tax 1% Franchise Tax 3%


FY 2007 New MexicoCounty Tax Revenues

Property Tax 55% Cigarette Tax 0%

Gasoline Tax 1% Lodgers Tax 0%

Motor Vehicle Excise Tax 1% Franchise Tax 5%

G R i t T 43%


Gross Receipts Tax 43%


REVENUE FOREAST - NOT PRETTY

Shortfall could still get worse (although recent forecast improved)Federal stimulus money going awayGovernor released worst numbers than the “consensus”

Differing assumptions (i.e. Guv didn’t assume continuation of austerity measures)Medicaid is biggest question




Source: December 2010 Consensus Revenue Forecast


N.M. Tax Research InstituteSource: December 2010 Consensus Revenue Forecast


Annual Growth Rates by Revenue

10 0%

20.0%

30.0%

-10.0%

0.0%

10.0%

Gross receipts tax

Personal income tax

Corporate income tax

-40.0%

-30.0%

-20.0% Energy-related revenues

4FY10 FY11 FY12 FY13 FY14

Source: July 2010 Consensus Revenue forecast.

•All revenues fell in FY10, O&G revenue fell sharplyStrong recovery expected for CIT O&G


•Strong recovery expected for CIT, O&G•Moderate growth in PIT, GRT, Other Sales Tax


Oil & Gas Production Trends110.00%

95.00%

100.00%

105.00%

%

80.00%

85.00%

90.00%

2000

= 1

00%

60 00%

65.00%

70.00%

75.00%

60.00%

Jun-0

0

Jun-0

1

Jun-0

2

Jun-0

3

Jun-0

4

Jun-0

5

Jun-0

6

Jun-0

7

Jun-0

8

Jun-0

9

Source: ONGARD systemGas prod ction decline accelerated in the last 2 ears


•Gas production decline accelerated in the last 2 years•Partly due to more liquids processing•Oil production appears more stable

Economic Environment- Rate Growth and Pyramiding

15

8.5%

7.5%

8.0%

Albuquerque

Las Cruces

6.5%

7.0%Farmington

Santa Fe

Rio Rancho

Roswell

Alamagordo

5.5%

6.0%Alamagordo

Clovis

Hobbs

5.0%1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010


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 becomesbusiness inputs (business to business sales) and becomes 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 relativeGRT is also regressive (hit s poorer households harder relative 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


receiving more revenue from GRT than property tax.

Political Environment17

Broadening discussion of budget cuts and tax Broadening discussion of budget cuts and tax increasesShortfall too lengthy for “kick the can” strategies aloneSocial advocacy groups, religious groups and unions calling for more business and income taxes less calling for more business and income taxes, less budget cutsBusiness advocacy and others calling for greater y g gfocus on gov’t spending reductions and no tax increases targeting business


Political Environment18

Most agree cuts are still necessaryMost agree cuts are still necessaryMany feel tax increases may be necessary or inevitableGovernor 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 h h? ( i il ti dit id ) how much? (similar questions on expenditure side)


Tax Policy Issues19

Taxes are necessary in that they pay for public Taxes are necessary in that they pay for public services, but:

Taxes can cause economic distortions, inefficiencies, and i i iinequitiesEconomic implications of different tax increase proposals varyyThe state needs to minimize negative impact of increased taxes on job creation as well as impacts on the most vulnerable vulnerable


Tax Proposals20

Include most significant tax programsInclude most significant tax programsAre often “retreads” of previous proposalsDon’t represent the only optionsDon t represent the only options

Endless options/”variations on a theme” possible

Some options from blue ribbon tax reform Some options from blue ribbon tax reform commission and Guv’s budget balancing committeeInclude compliance enhancement proposals that p p pdon’t “raise taxes”Use terms like “loophole” to avoid “increasing taxes”


Passed Tax Proposals – Regular Session 201021

Tax Credits and Other MeasuresTax Credits and Other MeasuresLas Cruces Tax Increment Project (HB 112)Transport of Dairy Waste for Gas Tax Credit (HB 171)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)E i D l t T I ti Ch (SB )Economic Development Tax Incentive Changes (SB 47)Affordable Housing Tax Credit Use & Vouchers (SB 144)County Gross Receipts for Certain Projects (SB 162)


County Gross Receipts for Certain Projects (SB 162)

Passed Tax Proposals – SS 201022

Senate Finance Committee Substitute for Senate Bill 10, 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 percent (a/o 7/1/10), by g p ( / 7/ / ),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 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).


Passed Tax Proposals – SS 201023

House Taxation and Revenue Committee House Taxation and Revenue Committee Substitute for House Bill 3 - non-vetoed portions:Increased cigarette tax by 75 centsChanges distributions to hold some beneficiaries harmlessVETOED – existing distributions to local governments and ne distrib tions to the PED for earl childhood ed cation new distributions to the PED for early childhood education and CYFD for early childhood programsThe total general fund revenue generated by the bill is g g yapproximately $33.9 million post veto, (previously $22.5 million).


Tax Proposals-Personal Income Tax24

“Roll Back Richardson Tax Cuts” PITRoll Back Richardson Tax Cuts – PITWe raised personal income taxes this year already

Tax rate “surcharge” at varying income levelsg y gNM 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 reportingp y p gNew 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 grelative to surrounding states, (except for filing group elections)

Tax Proposals - Gross Receipts Tax25

Increase GRT ratesIncrease GRT ratesAlready increased GRT and Compensating Tax by 1/8%Negative Consequences to business and poor alike

Eliminate or alter “hold harmless” provisionsRepeal or alter “food tax” deductionp

Candy & sodaProvision passed and vetoed this year

hOther?


Tax Proposals - Gross Receipts Tax26

Increase GRT ratesIncrease GRT ratesAlready increased GRT and Compensating Tax by 1/8%Negative Consequences to business and poor alike

Eliminate or alter “hold harmless” provisionsRepeal or alter “food tax” deductionp

Candy & sodaProvision passed and vetoed this year

hOther?


Other Taxes27

Oil and gas taxesOil and gas taxes“Equalize” oil and gas tax ratesProgressive rate structure

Impose higher “sin” taxesAlcohol?Al d i d i / kAlready raised cigarettes 75 cents/pack

Increase gasoline taxesTax currently goes to road fundTax currently goes to road fund


Other Taxes28

M t hi l i tMotor vehicle excise taxNM low at 3% with little ED implicationTurnover tax so rate should be less than GRTTurnover tax so rate should be less than GRTSector still in downturn.

Insurance premiums tax Increase health premiums 1%

Many health services now out of GRT baseRetaliatory taxes


Other Taxes – Property Tax29

Valuation LimitationPopulist initiativeUnintended consequences – “Tax Lightning”

2 District Court taxpayer wins (Bernalillo County) on appealp y ( y) ppDecision on appeal not expected soon

Related issues - multi-family dwelling classification“Fixes”

Good time to fix in downturn;Current and correct is best policy, BUTWinners and Losers likely result from any “fix”y yPolitical Environment odd

Speaker Lujan appearsinvested in current lawNot a General Fund issue in the midst of GF budget crisis


Proposal to reduce mill levy for UNMH

Business Incentives30

• Always scrutinized• Always scrutinized• In total cost under $94M, down from over $120M• Many used little and repeal offers little savings• Many used little and repeal offers little savings• Utilized incentives enjoy support• New sunsets and clawbacks possible as are caps • New sunsets and clawbacks possible, as are 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

Business Incentives31

Film creditFilm credit$76M in 2009; $65M in 2010

High wage jobs tax credit$14M in 2009; $4.6M in 2010

Technology jobs tax credit$6M i $6M i $6M in 2009; $6M in 2010

Renewable energy production tax credit$15M in 2008; 0 in 2009$15M in 2008; 0 in 2009

Investment credit$11M in 2009; $7M in 2010


Non-Tax Revenue Enhancement Proposals32

Varying means of converting capital money to general fund operating funds

Rate swap OGEST with SeveranceRate swap OGEST with Severance“Sponge” bonds

Trade capital for operating (pork=construction)

Permanent endowment fundsAlready paying out more than taking in; lost over $1 billion in the last quarterbillion in the last quarterRequires Constitutional ChangeAlternative – Sell Note to P-Funds as “Investment”


Essentially borrowing money from future

Summary33

Revenue/budget situation uncertain but remains bleakbleakTaxes increase proposals have been introducedTaxes increases of some sort are likely (although Taxes increases of some sort are likely (although they may not be called that)How you tax matters – do the least harmo you a a e s do e eas aProperty Tax Lightning may get addressed


New Mexico Budget Situation

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