Preying on the poor: Why the state needs to curb payday lending abuse

Imagine taking out $200 for a short-term loan but paying back $2160.40 in interest and finance charges. No one with access to a bank or credit card would consider such a bad deal, but for hundreds of New Mexicans, a loan of this type might be their only option when they’re short on cash.

Some state lawmakers have tried during the current session to stop payday lenders from exploiting New Mexicans by floating legislation requiring a 36 percent cap on interest rates and fees. But those measures are most likely dead for the year.

In New Mexico, individuals who borrow money from payday lenders often take out a short-term payday loan for a relatively small amount of money (several hundred dollars) to tide them over until their next payday. Yet, the average cost of fees and interest rates are over 300 percent and consequently exceed the amount of the original loan by an extortionate amount. When repayment time comes, borrowers are encouraged to renew or “rollover” their loans—essentially taking out a new loan to pay off the original loan. According to one report by the Consumer Financial Protection Bureau, four out of five borrowers renew their loans within fourteen days of taking the original loan. The new loan comes with new fees and the amount owed quickly grows beyond what the borrower could ever repay.

What makes payday lending an especially abusive practice is the fact that these lenders prey on individuals in lower income brackets, and this traps them in a vicious cycle of debt. According to the New Mexico Fair Lending Coalition, single mothers, low-income families, veterans, and people of color are most likely to use payday lenders.

For many low-income borrowers, taking out a payday loan often seems like a plausible solution when they’re short on cash and need to pay their living expenses. According to one report, individuals are more likely to borrow money from payday lenders to pay for everyday living expenses than for unexpected expenses and emergencies. Those who borrow from a payday lender are less likely to have a bank account or able to borrow from a bank, so a payday loan might be their only option.

Payday loans are not only harmful for individuals, but they are also harmful for the economy. According to one independent study, for every dollar spent on costly payday loans, the economy loses $.24 because borrowers lose purchasing power as a result of these loans. This means less money is spent in New Mexico’s economy. What’s more, five out of six payday lenders in New Mexico are owned by out-of-state corporations, so the loan money—including fees and interest—are removed from the state and its economy.

Legislation to end these abuses has been enacted in the past, but payday lenders simply modify their loans to get around them—changing their payday loans to “installment” loans, for example. The only real solution is to cap interest rates and fees on all loan products. Twenty states have already capped interest rates between 17 percent and 36 percent and the federal government has capped rates at 36 percent for active military members.

The 36 percent cap is a much-needed provision that will prevent people who are already struggling financially from experiencing even more financial difficulties. The sad reality is that these predatory lenders prey on those who can least afford it. Once borrowers are lured in, they are easily trapped in an endless cycle of growing debt by rollovers and renewals. These lenders’ practices are harmful not only to individuals, but also to the economy. That makes it everyone’s business to ensure that these safeguards are put in place.

Savanna Shay Duran is a senior at the University of New Mexico and an intern at New Mexico Voices for Children.

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How New Mexico’s unemployment insurance system fails everyone

Legislation that would have cut unemployment insurance (UI) benefits for workers who have been laid off was struck down in the state House of Representatives this week. Hopefully that means the issue is dead for this session. Further cutting UI benefits would have made a system that is already failing even worse.

New Mexico’s UI system is failing both the workers—who desperately need it to stay afloat between jobs—and the state—which also needs it to keep the already weak economy from a further downward spiral. UI payments have been slowed, and benefits were even cut in previous years, in part to keep insurance premiums on businesses low. While businesses are enjoying lower premiums, they are not enjoying having fewer customers with money to spend on their goods and services. Fewer customers ultimately lead businesses to lay off employees, who then have less money to spend—thus the downward spiral. Further cutting benefits would have led to even less money circulating in the economy and helping families put food on their tables and a roof over their heads.

Unemployment insurance has both a moral and an economic dimension. From a moral point of view, the intent of UI is to keep people who are unemployed through no fault of their own from falling into financial ruin. The economic rationale for the program is that UI, along with food stamps (now known as SNAP), is a so-called automatic stabilizer that keeps the demand side of the economy from collapsing during a recession.

The moral rationale for the UI program is strong: people who lose their jobs or who are laid off in the course of a recession are victims of the workings of the business cycle that always afflicts the capitalist economic system. The Great Recession that began at the end of 2007 was the most severe downturn since the Great Depression in terms of output and employment lost.

In New Mexico the unemployment rate rose to 8 percent during the recession, and was very slow to fall from its peak. During the early course of the recession the UI program was performing its dual functions well: unemployed people were being helped and the UI program was making a contribution to restoring the health of the economy by shoring up demand for the goods and services provided by the state’s businesses.

In 2009, an average 72 percent of the unemployed received payments under the UI program—this is called the ‘recipiency ratio.’ Of those beneficiaries, 46 percent were covered by the New Mexico UI program and an additional 36 percent were covered by emergency federal programs. The picture began to deteriorate in 2010, though, when 66 percent of the unemployed were receiving UI payments (with 34 percent covered by the state program and another 32 percent covered by the federal add-ons). The situation continued to worsen slightly in 2011, with an overall recipiency ratio of 63 percent (32 percent state and 31 percent federal). By 2012 just 55 percent of the unemployed were receiving benefits (32 percent state and 23 percent federal).

During this time, the shifting political balance of forces on the national level was leading to declining availability of UI, even though the recession in the labor market was clearly not over. In 2013 only 36 percent of the state’s unemployed were receiving UI (26 percent state and 10 percent federal). By the first quarter of 2014, which brought the expiration of all emergency federal programs, only 25 percent of the state’s unemployed were receiving UI. By the third quarter of 2014 (the latest quarter available) the UI recipiency rate was stagnant at 26 percent (23 percent state and 3 percent federal). That is, only a quarter of the unemployed were receiving UI benefits.

The severity of the recession had led the balance in the New Mexico UI Trust Fund—the fund from which UI benefits are paid—to fall from almost $600 million before the recession, to below $50 million in 2014. This should have been corrected by raising employer taxes substantially to replenish the fund, but that is not the approach the state took. Instead, in 2011 the Legislature cut the number of dependents who could receive the dependent allowance of $25 per week per dependent to two, down from the four, dealing a blow to large families. The Legislature also restricted the availability of UI payments for students. An employer rate increase was approved by the Legislature in 2011, but vetoed by the Governor. Another slight UI rate increase was approved by the 2012 Legislature and approved by the Governor.

By the third quarter of 2014 the UI Trust Fund balance had grown to $83.3 million, but this was due to the improvement in employment growth not the modest rate increase, which did not take effect until January 2015. It is still far too small. An adequate UI Trust Fund balance is probably in the $800 million to $1 billion range, judging from how rapidly the trust fund was depleted during the recession that began in 2008.

The recovery from the national recession has been glacially slow in New Mexico, as the state ranks 45th in the nation for its labor force participation rate. By December 2014, the unemployment rate in New Mexico was 6.1 percent, 18th highest among the states, and a half point above the national rate.

The failure of the New Mexico’s policy toward the unemployed, as shown by our state’s abysmal UI recipiency rate, is both moral and economic. It is unconscionable for the state to leave its unemployed residents with no options but to spend all of their savings and end up destitute. The failure is also economic, as UI cannot fulfill its function of ‘automatic stabilizer’ to maintain demand for the goods and services of the state’s businesses. Proposals to further cut unemployment benefits should be defeated.

Gerry Bradley is Senior Researcher and Policy Analyst for NM Voices for Children. Reach him at gbradley@nmvoices.org.

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The minimum wage has to be raised the right way

Increasing the minimum wage, which would positively affect many workers, continues to be discussed during the current legislative session. Raising the minimum wage benefits workers and the economy because low-wage workers will spend their extra income. Raising the wage will allow workers to purchase necessities like food, diapers and gas—most of which will be purchased at local businesses. This circulates money back into the economy, creating jobs. Several bills that would raise the wage are under consideration, but for the increase in the minimum wage to be successful, it must be done correctly.

The minimum wage for the state—$7.50 an hour—has not been raised since 2009. A bill to raise the minimum wage to $8.50 was passed in 2013 but was vetoed by Governor Martinez. The Governor has since stated that she would be willing to raise the minimum wage by a much smaller increment. Several bills are being considered during the current legislative session.

It is impossible to live off of a minimum wage income—this is especially true for families. At the state minimum wage of $7.50 an hour, an individual working full time earns just $15,600. That is lower than the federal poverty level for a family of two. What’s more, when it is raised so rarely, the minimum wage simply cannot keep up with inflation. One of the steps that must be taken to prevent wages from decreasing in value is to ensure that they rise with inflation. This is called indexing, which automatically adjusts the wage to the Consumer Price Index. By doing so, it will prevent inflation from decreasing the purchasing power of workers’ wages. House Bills 20 and 138 would raise the wage to $10.10 and $8.40, respectively, and include indexing. Senate Bill 432 would raise the wage to $10.10 in steps over the next few years and then begin indexing.

In order for the minimum wage to benefit all workers and the economy, the bill must be free from loopholes that prevent certain workers from benefitting. Some lawmakers want to allow businesses to pay workers less than the minimum wage while they are in the early months of the job. This so-called “training wage” gives unscrupulous businesses an incentive to fire workers once they have completed the training period to avoid paying the increased minimum wage. Senate Bill 10 would raise the minimum wage to $8.30 an hour but allow employers to pay a $7.50 an hour training wage for six months.

Another potential provision of the increase in minimum wage that would be detrimental would be to preempt the right of cities and counties to raise the minimum wage above that of the state. This would prevent local governments—and in some cases their voters—from adjusting the minimum wage to the local cost of living as needed. While House Bill 498 would preempt local minimum wages laws, it has the added disadvantage of not raising the minimum wage.

The simple truth is that it is impossible and impractical to live off of a minimum wage income. The benefits of raising the minimum wage will ultimately help individuals and families who are earning low wages as well as help the state’s economy. But it must be done correctly.

Savanna Duran is a senior at the University of New Mexico and an intern at New Mexico Voices for Children.

 

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Increasing one proven and effective way to give New Mexico workers a hand up

Note: These remarks were given as expert witness testimony to NM Legislature’s House Ways and Means Committee on HB 293: Increasing the Working Families Tax Credit, February 16, 2015

New Mexico’s Working Families Tax Credit is based directly on the federal Earned Income Tax Credit (EITC), which was enacted in 1975. New Mexico’s credit was enacted in 2007 at 8 percent of the value of the federal EITC and raised the following year to its current value of 10 percent of the EITC. Both credits are refundable income tax credits available to low- and lower-middle-income workers. Each year the EITC injects about $500 million into New Mexico’s economy, and the Working Families Tax Credit provides an additional $50 million in benefits to New Mexico families.

These credits are widely supported as bipartisan, common-sense, anti-poverty, and pro-business measures that have a high return on investment because they are good for families and kids, and they are good for businesses and the economy.

First, we know that these credits are great for New Mexico’s kids and families. Every year, 200,000 New Mexico workers and the 300,000 New Mexico kids they are raising benefit from the credits, and 97 percent of the value of the credit goes to working families with kids.

The families use these credits in different ways. For some, the credits are lifelines; and each year, these two credits alone lift more than 40,000 New Mexicans—half of them children—above the poverty line. Other families use them for support during tough, but temporary, economic times (things like the birth of a child or the loss of a job), and three out of five workers claim the credits for only one to two years. The credits are used to help families afford basic necessities as well as, research shows, big expenditures that they otherwise couldn’t afford such as, and most commonly, major car repairs. Other recent research shows that in the two months following when they receive these credits, workers are much more likely to purchase fresh produce and fresh fruits and vegetables, and so we know that the credits help families eat healthier as well.

In addition to being good for New Mexico families, we also know that these credits are good for New Mexico’s businesses and economy. Part of this is because extensive research shows that these credits encourage work and help keep people in the workforce. They also help low-wage workers keep more of their income, and that income, as well as the credits themselves, are very likely to be spent quickly and locally.

Business owners strongly support these credits not only because they help keep cash circulating and being spent, but also because workers who are better able to afford things like reliable transportation and reliable child care are more likely to be reliable employees.

But as great as we know that these credits are, we also know that New Mexicans face some big challenges. The most recent Census data show that New Mexico is ranked next to worst on overall poverty; we’re also next to worst on child poverty. KIDS COUNT ranks New Mexico 49th out of 50 on overall child well-being; and New Mexico has more working poor families per capita than any other state in the nation. New Mexico workers are facing an uphill battle. Increasing New Mexico’s Working Families Tax Credit is one proven and effective way to give these workers a hand up, while also still continuing to support our kids and our businesses.

Amber Wallin is a Research and Policy Analyst with NM Voices for Children.

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Recent deep spending cuts are the fly in our budgetary ointment

Note: These remarks were given at the state Capitol during the “Moral Monday: The State Budget as a Moral Document” rally on February 9, 2015, which was sponsored by local labor unions.

My dad was a proud member of the National Association of Letter Carriers Union and I’m proud to stand with our friends in organized labor today. I’m Bill Jordan with New Mexico Voices for Children and I want to thank you all for being here to stand together.

Today we’re talking about the state budget, and you know, there’s been a lot of people in this Roundhouse taking credit for—quote—“balancing the state budget during the recession and fixing the worst budget deficit in our history.” And while everybody argues over who balanced the budget, they all missed the more important point about how they balanced the budget.

So I’m going to tell you.

In order to get through the recession, all 50 states ran into tough times and a lot of them had to either make spending cuts or find a way to raise more revenue. States did what they valued most. Some made cuts and others raised more revenue.

Here’s what New Mexico lawmakers did to balance our budget:

  • In per-pupil spending, we made the 11th deepest cuts in the nation to K-12 education. New Mexico is now spending 8 percent less per student than we did in 2008.
  • Of all the 50 states, New Mexico made the deepest cuts in the nation to per-student higher education funding. That led to steep tuition increases and that broke the lottery scholarship program.
  • We even cut special education. We cut it so deeply that we lost even more federal dollars for special education.
  • We cut eligibility for child care assistance so deeply that thousands of families have been put on a waiting list for the last seven years. And we still have not restored eligibility for child care to pre-recession levels.
  • We cut youth tobacco prevention programs, after-school programs, youth suicide prevention, mentoring programs, and numerous other child and family support services.
  • And I’m sure you all remember the story last year that revealed that the Children, Youth and Families Department (CYFD) failed to adequately staff Child Protective Services, which investigates child abuse and neglect, and saved $6 million.

This is nowhere near a complete list, but it’s enough to make evident that while New Mexico’s elected leaders balanced the budget, they did it on the backs of our children. It should come as no surprise then that it was during these last few years that our ranking for child well-being plunged to 50th in the nation, and now stand at 49th.

We will not improve child well-being unless we begin to prioritize education and support programs that work. And we can’t do that without adequate funding.

And I know that you know that they also balanced the budget on the backs of workers. The number of state employees has dropped by several thousand since 2008. That means you all who are public servants are working harder and, as the example of CYFD points out, you’re carrying bigger caseloads.

And while we have more children in our classrooms than ever before, we also have several thousand fewer teachers than we did in 2008.

Our state budget is a moral document.

If you say you support our families and want them to do their best, then show me the money!

If you say you support our kids and want them to do their best, then put your budget where your mouth is!

If you say you support workers, then give them a decent wage, and stop trying to take away their right to organize.

I’ve been here at your state Capitol every day of this session. And in committee hearings and floor sessions every day, I’ve heard about all the things that lawmakers would like to do, but alas, there is no money. Well, there is no money because they gave it away!

So rule number one is: stop giving the money away in big tax cuts for special interests and out-of-state corporations.

Rule number two is: put some justice back into our tax system and ask the rich and out-of-state corporations to pay their fair share. Raise the revenue we need to fund what is really important to all of us who call New Mexico home.

Isn’t it funny how they tell all of us they don’t have the money for workers and kids and families, but they always seem to have money for big corporate tax cuts—$250 million in the big corporate tax cut passed in 2013. No, it’s not funny! And it’s not moral! It’s not the priorities that New Mexicans share or deserve!

And so they nickel-and-dime our kids, they nickel-and-dime our workers, and the special interests and out-of-state corporations walk away with hundreds of millions in tax cuts. And the saddest irony of all? We’ve got nothing to show for it! We’re last in the region in job growth.

You want real economic development? Treat your working families with the respect and dignity they deserve.

We need to stop obsessing about which tax to cut next and instead make sure we have the funding we need for world-class education, health care, public safety systems, and the other quality-of-life issues that will make us an attractive destination for entrepreneurs, recent college graduates, business men and women, and working families.

I believe New Mexico workers are the best, and we should raise their minimum wage.

I believe New Mexico families are the strongest families in the nation, and they deserve our support.

I believe New Mexico’s children are the best and brightest when we give them a strong start and follow it up with every opportunity they need to succeed.

Let’s give all of our kids the future they deserve. Let’s give our working families the support they need. And let’s give our minimum wage workers a raise and make sure that all workers keep their right to organize!

Thank you!

Bill Jordan is Senior Policy Advisor/Governmental Relations for NM Voices for Children. Reach him at bjordan@nmvoices.org.

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A modest proposal that would make state decision-making more effective

Our legislators have a lot of important decision to make, such as how to divvy up the money that pays for services like education, public health, and our court system. That is why they have expert staff members to advise them. For example, the Legislative Finance Committee, which is tasked with creating the annual budget as well as recommending changes to the tax system, has a full-time staff that works year-round. These staff members are available to do things like study emerging issues, analyze best practices, write reports, and make recommendations. Without these services the committee’s work would be much more difficult and the results would be less reliable. The Legislative Education Study Committee, which oversees our state’s educational systems from kindergarten to college, also has a full-time, year-round staff.

But the Legislative Health and Human Services Committee (LHHS), which has a very full plate of very big responsibilities, has very few staff members who work just part of the year. Senator Jerry Ortiz y Pino has sponsored SB 41, which would provide the committee with full-time, year-round staff. This makes good sense for a number of reasons:
 

  • The health and human services programs are the fastest growing parts of the state general fund budget. In fact, the fiscal impact report for SB 41 estimates that nearly one-third of the annual state operating budget goes to health, hospitals, and human services needs.
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  • The LHHS has one of the largest work plans of any interim committee. They are tasked with:

    • Oversight of Medicaid and the Human Services Department, the NM Health Insurance Exchange, tribal health programs, state health care purchasing, prescription drug initiatives, SNAP, nutrition, obesity, and hunger programs, homelessness, and TANF;
    • Oversight of the Children, Youth and Families Department, including child abuse and neglect, early childhood programs and juvenile justice programs (in tandem with the Courts, Corrections and Justice Committee);
    • Oversight of the Department of Health, public health, health care workforce issues, and health infrastructure issues;
    • Oversight of the Department of Aging and Long Term Care;
    • Oversight of services like maternal and infant mental health, behavioral health treatment for mental illness and substance abuse, including health care in the corrections system, services for sexually exploited minors, and grandparents as caregivers;
    • The continuing work of the J. Paul Taylor Early Childhood Task Force; and
    • The work of two subcommittees: Behavioral Health, and Disabilities Concerns.

     

  • Expanding the LHHS would mean the committee could meet for a few extra months in the spring, allowing it to do more of the important work it is tasked to do.
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  • Expanding the LHHS would mean that the committee would have staff analysts to study and recommend evidence-based solutions for many of our social problems.
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  • Health care reform has dominated the work of the LHHS for several years, crowding out other aspects of their work plan.
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  • The Welfare Reform Oversight Committee has been disbanded and their work has been transferred to the LHHS.

 Perhaps the most important reason, is that even though nearly every indicator of child well-being has New Mexico at or near the bottom, no single legislative committee is charged with studying and recommending initiatives to improve our ranking. The executive branch has not come forward with a plan, the Children’s Cabinet is currently either inactive or ineffective, and the Legislature as a whole failed to act on a proposed Children’s Council. The LHHS is the obvious body to do the work, but only if it has the resources to carry it out. SB 41 asks to reallocate existing funds and does not increase costs in any way.

If our elected leaders are serious about improving the outcomes for our children, addressing poverty and income inequality, and improving our quality of life in order to increase economic development, then they should empower the LHHS to do this important work.

Bill Jordan is Senior Policy Advisor/Governmental Relations for NM Voices for Children. Reach him at bjordan@nmvoices.org.

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The tax credits that make life a little easier for working families

If you worked but earned less than $47,000 last year, you may qualify for a refundable tax credit called the Earned Income Tax Credit (EITC). It could be worth as much as $6,143.

Today is National EITC Awareness Day, a nationwide effort to increase public awareness about the benefits of the federal EITC, which is available to low- and middle-income working families. It helps people who work hard meet basic needs for food and transportation and provide for their children. New Mexico’s Working Families Tax Credit (WFTC) is based directly on the EITC and provides additional benefits for New Mexico’s working families and communities. It can be worth up to $614 for those who qualify for the EITC.

The EITC has been making the lives of workers a little easier since 1975. Yet the IRS estimates that nationwide one in five eligible workers still miss out on the EITC, either because they don’t claim it when filing or they don’t file a tax return. This is money that can and does make a big difference. Last year alone, New Mexico’s working families received nearly $500 million from the federal EITC and nearly $50 million from New Mexico’s WFTC. The average amount New Mexicans received last year was $2,600 when the two refunds are combined. That’s money working families are very likely to spend quickly and locally at businesses in their own communities, so it’s good for the state’s economy too.

The amounts of the EITC and WFTC vary by income, family size, and filing status. The credits are for workers whose earned income does not exceed the following limits:

  • $46,997 (or $52,427, if married and filing jointly) with three or more qualifying children
  • $43,756 ($49,186, if married and filing jointly) with two qualifying children
  • $38,511 ($43,941, if married and filing jointly) with one qualifying child
  • $14,590 ($20,020, if married and filing jointly) with no qualifying children

The online EITC Assistant can help determine your filing status and eligibility, and will help you estimate the amount of your federal credit. This help is available in both English and Spanish. Free help preparing your return and claiming the EITC and WFTC is available at volunteer income tax assistance sites such as CNM’s Tax Help New Mexico, which has locations across the state. To find a location near you, visit CNM’s Tax Help website or call 505-224-4829. You may also call the IRS at 1-800-906-9887 for assistance.

People who work full-time should not have to live in poverty. Refundable tax credits like the federal EITC and New Mexico’s WFTC incentivize hard work, help working people families, and drive economic activity in New Mexico communities. The credits can and do make working families’ lives a little easier.

Amber Wallin is a Research and Policy Analyst for NM Voices for Children.

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An expensive, unfair, and poorly targeted tax cut

When it comes to state and local taxes, middle- and low-income New Mexicans pay a tax rate double what the wealthiest pay (as discussed in this blog) and part of this inequity is due to an extremely generous tax cut enacted by the Legislature in 2003. Those who have capital gains income—that’s income from the sale of stocks, bonds, real estate, and the like—can deduct half of it from their personal income taxes.

As most capital gains income goes to people who already have the most money, those are the tax filers who receive the most benefit from the deduction. Almost 90 percent of the value of the deduction goes to taxpayers with an adjusted gross income of more than $100,000—which is more than double the state’s median household income. More than half is claimed by taxpayers with adjusted gross income over $1 million. Less than 1 percent of the state’s taxpayers earn this much money. Clearly, the benefits of the capital gains deduction are skewed to those who need it the least. The deduction also means that wage income is taxed at a higher rate than un-earned income. It also costs the state millions of dollars in lost revenue every year and we get no benefit in return.

capital gains graphicWhen the capital gains deduction was enacted—as part of a larger tax package that drastically cut marginal income tax rates for those at the top of the income scale—it was touted as a way to encourage corporations to move their headquarters to New Mexico. There is no evidence that this deduction has brought corporate headquarters to New Mexico or that the deduction has helped the state’s economic development. Recently, one of the few companies with corporate headquarters in New Mexico—EMCORE—was sold and is in the process of moving its headquarters to California.

The state’s employment pattern since the enactment of the deduction has followed the national trend; first a housing construction and price bubble between 2003 and 2007, then a collapse and a slow recovery since 2009. New Mexico’s recovery has been much weaker than it has been for the nation as a whole, as our job and personal income growth still struggle to reach national rates. Clearly, the capital gains deduction has not helped our economy.

In 2007, 140,000 New Mexico tax returns claimed capital gains income, worth more than $3.3 billion. Though that fell to a low of 103,000 returns during the recession (with capital gains income of less than $700,000), it is expected to be back to more than 140,000 by this tax year. It’s very unlikely that New Mexico’s economy will have regained all the jobs lost during the recession by the end of 2015.

The table below provides a timeline and forecast of capital gain income and the cost of the deduction to New Mexico. The cost of the deduction rose from an estimated $21.2 million in 2003 to $77.6 million in 2007, at the peak of the housing bubble. The cost of the deduction fell to its lowest point of $16.1 million in 2009 and is expected to rise to $63.8 million by 2017.

capital gains graphics
The capital gains deduction is ineffective, benefits those taxpayers who need the break the least, and is expensive—likely reducing general fund revenues by $64 million in 2017. This is funding needed for education, health care, public safety, and other vital services. The capital gains deduction should be repealed by the Legislature.

Gerry Bradley is Senior Researcher and Policy Analyst for NM Voices for Children. Reach him at gbradley@nmvoices.org.

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Why the poor pay the highest tax rate in New Mexico—and one step toward a fix

It’s widely agreed that the poorest among us should not pay the highest tax rate, but in New Mexico (as in most states) they do. State and local taxes—particularly sales and property taxes (shown in the light blue and orange bars in the graphic below)—take up a higher percentage of incomes at the lowest end of the scale. That’s because the smaller your paycheck, the more of it you spend just on day-to-day living expenses—most of which are taxed.

Graphic showing that poor pay a higher rate on state and local taxes

The only place where the wealthier pay a higher rate than the poor is in the state income tax (the green bars). In fact, New Mexicans earning less than $29,000 pay no state income tax at all. But even with graduated income tax rates, middle- and low-income New Mexicans shoulder a greater share of the state’s tax responsibility. There is a very easy way for policy makers to address this inequity—simply make the state income tax more progressive.

Our state income tax system used to be more progressive. The top marginal personal income tax (PIT) rate used to be 7.2 percent, but it was cut by 40 percent to 4.9 percent in 2003, as a “job creation” scheme. The ‘marginal’ rate is the rate in statute. However, few people pay that rate because they can receive tax credits and take deductions. Those with the highest incomes tend to be able to claim the most deductions. For example, New Mexicans can deduct 50 percent of their capital gains income—most of which goes to the wealthy—from their taxable income. (More on this overly generous deduction in our next blog.)

Increasing the top marginal PIT rate from 4.9 percent to 5.9 percent—which, incidentally, is the same rate as the New Mexico corporate income tax—would shift more of the tax responsibility to those more able to afford it. It would also increase PIT revenues by 11 percent, raising more than $140 million in revenue for New Mexico’s education, health care and public safety needs. Raising the top marginal rate to 5.9 percent would partially reverse the 2003 tax cut, which has proven ineffective in creating jobs or raising median income.

The table below, based on the 2012 tax year, shows the average rate of income taxes paid by income group both at the current PIT rates and if the top marginal rate were raised to 5.9 percent. The average tax rate for those with incomes over $1 million increases very slightly from 4.8 percent to 5.7 percent.

Personal income tax table

The next table shows the share of personal income taxes paid by the top four income groups would increase by as much as a full percentage point as a result of increasing the top marginal rate to 5.9 percent from 4.9 percent. The share paid by the income groups earning less than $100,000 would decrease, also by as much as a full percentage point. This would shift some of the responsibility for paying income taxes upward.

Personal income tax table

Raising the top marginal rate from 4.9 percent to 5.9 percent would improve the progressivity of the New Mexico personal income tax. This action would also raise revenues from the personal income tax by about 11 percent. Since revenues from the personal income tax are expected to be $1.3 billion in fiscal year 2015, according to the revenue estimates published by the New Mexico Board of Finance, this proposed increase in the marginal rate would result in additional revenues of about $144 million. In fiscal year 2016 the revenue increase would be $148 million. This would be especially important given the huge loss of corporate income tax revenue the state is seeing (read more about that in this blog).

Gerry Bradley is Senior Researcher and Policy Analyst for NM Voices for Children. Reach him at gbradley@nmvoices.org.

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The lingering near-death experience of the New Mexico corporate income tax

While profitable corporations require roads, police protection, and other public infrastructure and services as much as the rest of us, New Mexico has ensured that they will be paying much less of the cost to maintain them. The tax cuts for corporations enacted by the state Legislature and signed by the Governor in 2013 are proving to be much more expensive than originally estimated. So much so that within the next few years we will lose 60 percent of our corporate income tax revenue.

These steep cuts reduced the top corporate income tax (CIT) rate from 7.2 percent to 5.9 percent and allowed manufacturers to apportion their profits in a way that is extremely advantageous for them—but costly for the state budget. Stunningly, the cuts were enacted by legislators in the waning minutes of the 2013 session without a fiscal impact report (FIR)—an estimate of the cost of legislation that is created for virtually every bill under consideration. They were told (erroneously) that the tax cuts would be “paid for” with new revenue and some savings. The generous tax cuts were partially paid for by a slight increase in revenues from a change in how large retailers could file their tax returns. But it will be nowhere near enough to cover the enormous loses.

In December 2012, before the CIT cuts were enacted, revenues from the corporate income tax had been expected to rise from $281 million in fiscal year 2012 (FY12) to $410 million in FY17 (shown in the green line in the figure below). After the legislation was passed and enacted, the Legislative Finance Committee did prepare a FIR (the dark orange line). That report showed the state would lose just $7.2 million in FY14, with the loss growing to $111.6 million in FY17 as the tax cuts were phased in. (The tax cuts will not be completely phased-in until FY18. However, FIRs only look at the next five years, so the FY18 loss was not estimated at that time.)

As subsequent revenue estimates were made, the revenue picture continued to get bleaker and bleaker. In August 2013 (shown in the light blue line), state officials further reduced the projected CIT revenues—to $260 million in FY13 and $278.4 million in FY17—without explanation. This showed the FY17 $111.6 million loss growing to a loss of $131.6 million.

By August 2014 the revenue picture for the CIT had deteriorated even further (darkest blue line). The expected revenue from the CIT had fallen drastically to $200 million in FY17, $160 million in FY18 and $150 million in FY19. That was a drop of $80 million more than had been expected in the post-session FIR—meaning CIT revenues for FY17 are expected to fall by half.

When revenues for FY18 were first estimated (in August 2013), it was expected to be $258.5 million. By the December 2013 estimates, it had fallen to $206 million, then to $175 in the testimony given to the Legislature earlier this month. State officials have not been able or willing to explain the drop. The December 2014 testimony also projected CIT revenue falling by another $12 million to $163 million in FY19. If $410 million, the original estimate of FY17, is taken as a baseline, the estimated yield of the CIT will drop by $247 million, or 60 percent, between FY17 and FY19.

What accounted for the steep falloff in corporate tax revenues in FY17 and FY18? So far, state officials have been unable or unwilling to address the steep decline. However, corporate profits, the base for the CIT, have been steadily increasing, and there is no indication that this trend will end soon. That would mean, logically, that the effects of the 2013 tax cuts were more drastic than originally thought.

The obvious question is: Do the ever-dwindling estimates of CIT revenue mean that the cost of the 2013 corporate tax cuts were grossly underestimated? It certainly would seem so. It looks as though the CIT was decimated by stealth by the 2013 corporate tax cuts. In FY12, corporations paid 20 percent or one-fifth of total state income taxes. In FY19, corporations will pay just 9 percent of total income taxes.

In FY12 corporations paid 5 percent of total state taxes. In FY19 corporations will pay just 2 percent of total state taxes. If corporations pay less, and they clearly will, then more of the responsibility for funding state services will be picked up by taxes on people, through the gross receipts tax, other consumption-based taxes, and the personal income tax.

Gerry Bradley is Senior Researcher and Policy Analyst for NM Voices for Children. Reach him at gbradley@nmvoices.org.

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