A new study by the Center on Budget and Policy Priorities concludes that many
states risk chronic gaps between revenues and necessary expenditures in coming
years due to weaknesses in their tax systems. The study warns that even though
states may now enjoy expanded revenues due to the economic recovery (or, in the
case of New Mexico, due to additional tax revenue from taxes on high-priced oil
and gas), they could face serious budget problems in coming years if their structural
issues are not addressed (i.e., if the tax system does not take in enough money
to pay for basic services).
New Mexico is rated as a high risk for a structural
deficit based on its score of nine out of ten identified risk factors.
New
Mexico's structural deficit was created by several policies passed in the last
few years.
New Mexico's 2003 Personal Income Tax Cut Has Significantly
Reduced New Mexico's Revenue
- In 2003, New Mexico reduced its personal
income tax and, to a lesser extent, the sales tax. Between 2001 and 2004, the
state increased cigarette and motor fuel taxes. This is problematic because income
taxes provide stronger growth over the long term than sales and excise taxes.
- New
Mexico has failed to de-couple from the federal phase-out of the estate tax, which
eliminates a rapidly growing revenue source and costs the state an estimated $23
million per year.
- New Mexico's income taxes are linked to the federal
standard deduction, so that any changes to the federal standard deduction impacts
New Mexico's tax revenue.
Center on Budget and Policies Report Faulty
Foundations - New Mexico Fact Sheet
Additional Tax Policies and Factors
That Reduce New Mexico's Tax Revenue
- New Mexico has significant
loopholes in its corporate income tax.
- New Mexico could lose an estimated
$169 to $265 million in revenue per year due to the growth of e-commerce. This
loss is greater than the national average as a share of total revenue.
- In
New Mexico, the percent of sales subject to sales tax declined by 30.5 percentage
points from 1990-2003, exceeding the US median decline of 8.0 percentage points.
New Mexico's Tax Policy Less Fair
A basic principle of good tax
policy is fairness: the tax responsibility should be shared in a fair manner.
That is, higher-income earners should pay a higher percent of their income in
taxes than do lower-income earners. The 2003 personal income tax cut reduced the
tax responsibility of New Mexico's wealthiest citizens, while offering middle-class
and lower-income families little or nothing. As a result, New Mexico's tax policy
is much less fair.
Inadequate Funds to Maintain Current Services
New Mexico's expenses increase each year due to factors such as inflation,
a growing elderly population (and, for example, the expense of nursing home care
which is a significant portion of the Medicaid budget), the number of K-12 students,
the number of non-elderly disabled people, and the number of students with special
needs.
At the same time, New Mexico's revenue is decreasing. One consequence
has been under-funding of essential services and programs such as healthcare,
quality education and childcare.
Recommended Policy Action
- The single most significant step that could be taken to erase New Mexico's
structural deficit is to rollback personal income tax rates to pre-2003 levels.
- In
order to make more informed tax policy decisions, the state should produce the
following types of reports:
1. Tax Giveaway Report: Each year the state
should produce an analysis of the tax exemptions, deductions and incentives (i.e.,
all tax expenditures) provided to the business community to assess how much revenue
is lost to the state budget as a result.
2. Tax Fairness Report: The
state should also produce an annual report that analyzes who pays what percent
of their income in taxes, by income category to assess the fairness of the distribution
of the tax responsibility.
