by Melorie Begay, New Mexico In Depth
February 15, 2017

Republican Gov. Susana Martinez continues to say we need to tighten our belts rather than raise taxes in order to solve our current fiscal crisis. “She will not raise taxes,” Chris Sanchez, the governor’s spokesperson, told New Mexico In Depth this week.

Democratic Senate Majority Leader Peter Wirth, however, told the Santa Fe New Mexican this weekend the state can’t endure any more cuts and he is joined by lawmakers who favor raising new tax revenue to balance the budget and replenish the state’s reserve fund.

On its face the two positions set up a battle over whether to cut expenses or to raise revenue.

But it’s not so simple. The Governor has offered some wiggle room by saying she’d consider closing tax “loopholes.”

What’s a loophole?

We talked to half a dozen experts on tax policy and one thing is clear: the definition of a loophole is in the eye of the beholder. And, despite what the governor says, closing a loophole means someone will end up paying more in taxes.

The governor hasn’t specified what those ‘loopholes’ are and Sanchez didn’t elaborate when NMID asked him to point to loopholes the governor would be willing to close.

A review of the governor’s 2018 budget proposal provides a glimpse at what she’s thinking, though.

Closing one ‘loophole’ would generate $50 million for the state of New Mexico by eliminating the tax credits health insurers use to offset the costs of helping to pay for the operation of the state’s medical high risk pool.

Loophole, another word for tax expenditure

Buried within the state tax code are breaks in the form of exemptions, deductions and credits – or so-called tax expenditures. A tax expenditure is defined as any change that results in government taking in less money.

In New Mexico it’s much easier to get a tax break than it is to lose one. The joke around the capitol is “If you have a friend in Santa Fe, or can hire a lobbyist, you don’t pay gross receipt tax,” Rep. Jason C. Harper, R-Rio Rancho, recently told reporter Gwyneth Doland on New Mexico in Focus. The Legislature has enacted hundreds of such breaks, so many that our Gross Receipts Tax is as full of holes as a piece of Swiss Cheese, economist Kelly O’Donnell said on the same program.

The Martinez administration is already releasing an annual report that attempts to list current tax expenditures; the 264-page report released last week provides descriptions and the value of lost tax revenue of more than 200 items.

For instance, there’s a deduction for organ donation, a credit for preserving cultural properties and of course, the credit for film and television productions. There’s the Back-to-School Tax-Free Weekend families use to buy school supplies, clothes and computers without paying taxes on them. The state loses more than $3 million each year because it doesn’t collect taxes on those purchases but the idea is that the program helps families and helps the economy by increasing local spending.

But what if you think a tax credit for installing solar panels or using energy efficient appliances is worthwhile, but think a tax exemption for the oil and gas industry is a “corporate giveaway” or a loophole?

Some lawmakers like Rep. Elizabeth Thomson, D-Albuquerque, say that the executive branch report doesn’t have enough information to make informed decisions about tax policy.

“We have a lot of tax giveaways in this state—tax loopholes, tax breaks—and we have no method of determining if they’re beneficial,” she said during a committee hearing on a bill she’s sponsoring that would mandate more information about tax expenditures.

Thomson’s bill calls for creation of a comprehensive report every five years that assesses the economic impact of tax expenditure valued at more than $1 million. The report would include the cost of the expenditure, the number of jobs created by the expenditure, and businesses that qualify for the benefit but don’t use it.

Providing expert testimony at Thomson’s first committee hearing was James Jimenez, former Department of Finance and Administration Cabinet Secretary during Gov. Bill Richardson’s administration and now Executive Director of New Mexico Voices for Children, a policy research and advocacy organization.

Although creation of the report would make for some additional work for state agencies, Jimenez said, it ought to be viewed as fundamental to their work.

“Providing that basic information just like they provide the fiscal impact report is critical to your ability to make wise decisions regarding tax policy,” he told committee members.

Jimenez said the tax expenditure report released last week is too limited. The primary problem, he said, is that it only includes “cherry picked” tax expenditures.

“It’s not nearly broad enough and does not provide the legislature nor the executive the full range of tax expenditures that exist,” he said.

But not everyone agrees there’s a need for the comprehensive report Thomson envisions.
Some say lists and reports about tax expenditures don’t always give an accurate picture of the costs and benefits of a particular program.

“The tax expenditure budget is basically a worst case scenario,” Karin Foster, the executive director of the Independent Petroleum Association of New Mexico, told New Mexico In Depth. That’s because in order to really understand the value of a particular tax expenditure, expert knowledge of a given industry is needed, she said. For instance, for oil and gas expenditures any analysis would need to take into account how a given exemption is tied to commodity prices or federal laws.

“The numbers in that list could be over inflated, because when they try to estimate the impact they don’t really understand the underlying laws well enough,” Foster said.

A better approach, according to Foster, would be to tackle specific issues and industries on a rolling basis to allow for a more in depth analysis.

Richard Anklam, Executive Director of the New Mexico Tax Research Institute, echoed Foster’s statements by saying that tax expenditure budgets are often used as hit lists, even though the budget doesn’t always tell the full story.

It’s easy to look at a number and say “get rid of it,” but it’s hard to thoroughly evaluate its benefit to New Mexico, Anklam told New Mexico In Depth.

And he’s skeptical that a new report would be as effective as Thomson hopes. He says the current report already includes a lot of information that no one uses to end ineffective tax programs.

Melorie Begay, a junior majoring in multimedia journalism at the University of New Mexico, is a People, Power and Democracy 2017 intern working with New Mexico In Depth.

Marjorie Childress and Gwyneth Doland contributed to this report. 

Copyright 2017, New Mexico In Depth (