Note: this is the first installment in our series on policies passed during the 2019 legislative session that will improve equity in New Mexico. You can read the introduction, which gives more information on what we mean by ‘equity’ and what the disparities are, here.
By Paige Knight
May 14, 2019
Advancing racial equity is an investment in the lives and future of all children in New Mexico. Changing how states raise and spend money is one way we can help undo racism’s harmful legacy and ongoing damage while creating more opportunities for people of color. A powerful tool that can help get the job done is tax policy – who pays their fair share of taxes, who doesn’t, and who benefits. Our legislature made progress this session in leveraging this important equity tool.
For far too long, discussions on tax cuts, deductions, credits, and rates were centered on improving conditions for the wealthy and well-connected, which has made disparities worse. This year, we finally saw the conversation shift towards how tax policy can be utilized to improve the lives of families and children throughout our state. It was remarkable, refreshing, and desperately needed in order to advance racial and ethnic equity in New Mexico.
Improvements to our tax code this session were necessary because our current combination of state and local taxes perpetuates inequities. We ask low- and moderate-income New Mexicans – who are primarily households of color – to pay a greater share of their income in taxes than the state’s wealthiest pay – who are disproportionately white (see Figure I). The median income for white households with children is $72,200 in New Mexico. As you can see in Figure II, it’s significantly lower for Hispanic, Black, and Native American households with children.
Given their higher income and the policies that have advantaged whites while disadvantaging people of color, it’s not surprising that whites are able to accumulate more wealth than are people of color. The median net worth of white households in New Mexico is nearly ten times that of households of color (see Figure III). Home ownership makes up about two-thirds of the wealth of an average household, but, as Figure IV shows, whites are far more likely to own homes than are families of color.
This huge racial wealth divide did not occur randomly. It is the direct result of decades of discriminatory policies – such as being denied a loan for a home or business, or being denied the ability to live in certain neighborhood. Even today, there’s evidence that Blacks and Hispanics are turned down for home mortgages far more often than are white applicants of similar incomes. Another study shows that Black and Hispanic home buyers are far more likely than whites to receive high interest rates, even when they have similar financial situations. And because wealth accumulates over generations, the divide has only gotten worse over time creating patterns of poverty and wealth that are highly unequal along the lines of race and ethnicity. Tax policy can help undo some of these inequitable patterns that we see today.
The tax package passed by the legislature and signed by the governor – House Bill 6 – will raise much-needed revenue while utilizing the tax code to improve equity for our families of color. Several components of the bill help address income and wealth inequities, which in turn helps address racial inequities.
HB 6 added an additional income tax bracket[1] for the state’s highest earners and reduced the capital gains deduction, which prioritizes wealth over work. This will advance equity in New Mexico by requiring wealthy New Mexicans to pay a higher share of their income in taxes. It will also raise money for the health and education programs that make up the majority of our general fund budget and significantly benefit children of color in our state.
Another important equity component of HB 6 is the increase in the Working Families Tax Credit from 10 percent of the federal EITC to 17 percent. For a single parent with two kids, the increase means an additional $300 to spend on necessities like child care, health care, housing, and food. These refundable credits help level our lopsided tax system and directly benefit low- and moderate-income working families. The majority – 68 percent – of the 210,000 working New Mexicans who claim the EITC and WFTC every year are people of color.
The Legislature also missed an opportunity to help more families of color. HB 6 created a dependent deduction for every child beyond the first, helping undo the harm caused to families with multiple children from the 2017 federal tax reform package. But a deduction was not the best solution from an equity standpoint. A refundable child tax credit would have been the most beneficial for New Mexico’s families of color because it would have targeted those who need assistance with child-raising costs the most. A deduction lowers taxable income, making it worth far more to higher-income New Mexicans. A tax credit directly reduces the taxes owed, dollar-for-dollar, and a refundable credit would’ve especially benefited low-income earners who owed little to no taxes at the end of the year.
A lot of work remains when it comes to addressing inequities in our state tax code and raising sufficient revenue to support programs that help our children and communities of color, but the passing of HB 6 is an important first step. We can build on this progress by adding more high-income brackets to the personal income tax, fully repealing the capital gains deduction, enacting wealth taxes like an estate or inheritance tax, and expanding well-targeted tax credits. These measures will help create a tax system that is fair and equitable, help close the racial wealth divide, and ensure that all families in New Mexico have the opportunity to thrive.
Paige Knight is a research and policy analyst for NM Voices.
[1] The additional top bracket is contingent on FY20 recurring general fund revenues being less than 5 percent above FY19 general fund revenues.