by Bruce Krasnow, Santa Fe New Mexican
April 28, 2017

ALBUQUERQUE — Efforts to reform the New Mexico tax system have been complicated and contentious, yet Gov. Susana Martinez said Thursday she wants lawmakers to take on the task of redesigning the state’s gross receipts tax laws during an upcoming special session.

“I’ll be adding comprehensive tax reform to the agenda,” the governor said during a speech at the annual conference of the New Mexico Tax Research Institute at the Sandia Resort & Casino in Albuquerque. She said she supports a renewed effort to roll back many of the gross receipts tax exemptions, credits and deductions in state statutes, while lowering the overall tax rate.

The governor has said she will convene a special legislative session in Santa Fe sometime before the state government’s new budget year starts July 1 so that she and lawmakers can approve a spending plan. Both chambers of the Legislature passed a $6.1 billion budget in March for the next fiscal year, but Martinez vetoed nearly half the plan, leaving the entire higher education system and the Legislature with no operating funds.

She also vetoed a measure that would have balanced the budget by raising $350 million through new taxes and fees.

Martinez has said she will restore higher education funding during the special session, which is expected to cost $50,000 per day. Earlier this month, she said she wants to keep the session short, even limiting it to one day, and focused only on the budget.

But putting tax reform on the agenda would add an issue that won’t be easy to resolve.

State Sen. John Arthur Smith, D-Deming, who chairs the Senate Finance Committee, said reforming the state’s tax laws would be difficult during a special session, and that the priority should be pulling together a balanced budget for 2018.

“I’m not speaking against tax reform,” he said in a telephone interview Thursday, “but trying to do it in a special session in a short period is going to be a steep hill to climb. Trying to rush this through quickly is going to be a challenge.”

Smith also said the governor didn’t push tax-reform proposals until the end of the legislative session, and he wonders why it now is a priority. “If it was super important today, it was super important in January,” he said, “and she wasn’t speaking to that in the State of the State message” at the outset of the legislative session.

Martinez said that if all sides agree on tax reform going into the session, it can be accomplished quickly. It was debated for many hours during the regular session, and there is a framework of basic concepts, such as closing loopholes and lowering the overall tax rate.

Rep. Jason Harper, R-Rio Rancho, has been leading an effort to rewrite the tax code, working for more than a year to gather support from colleagues and the business community. His House Bill 412, more than 300 pages long, was not introduced until halfway through the 2017 session. It received two full days of hearings in the House, which passed it unanimously. But it ran into opposition in the Senate, where advocates for schools, local governments and nonprofit organizations said the proposed changes would increase the taxes they pay and force layoffs and further cuts in services.

The Senate moved forward with a more gradual version of the tax reforms. Smith and other Senate leaders said they wanted to be sure the state would have enough revenue coming in to support lower gross receipts tax rates.

With the state already facing spending cuts for public education and other services, many advocacy groups agreed. The nonprofit child advocacy group New Mexico Voices for Children reiterated that Thursday.

“Gov. Martinez’s sudden embrace of legislation that would overhaul the state’s tax system — and her desire to make such significant changes during a special session — are both irresponsible and appear to be an attempt to distract New Mexicans from the budget mess she created with her drastic vetoes,” said James Jimenez, executive director. “Such an important undertaking should be considered very carefully and should allow plenty of time for input from the public.”

A major focus of efforts to reform gross receipts tax laws is eliminating business-to-business taxes on goods and services, a concept known as tax pyramiding. It especially hurts the construction industry, which pays taxes when it buys materials and labor from subcontractors and then sells a finished product that is taxed again.

The practice affects any company that purchases materials and services from other firms, paying taxes on those transactions, and then taxes customers for its own products and services.

An analysis by economists for the Legislative Finance Committee estimates that doing away with tax pyramiding alone would cost the general fund at least $300 million annually. The money to replace those dollars, half of which pay for public education, would have to come from other sources, such as taxing nonprofit organizations on their purchases or taxing newspaper and textbook sales, which are now exempt.

Tax laws provide more than 100 separate exemptions or loopholes that could be closed. Some lawmakers support eliminating a tax exemption for groceries as a way to make up the shortfall.

But whether eliminating exemptions would create sufficient new revenue to significantly reduce the overall gross receipts tax rate is still unknown, according to the analysis. And if the rate doesn’t drop, then the reform effort would merely shift the tax burden from one payer to another.

Harper said he has been working to address many of the concerns and will offer an amalgam of language from several bills that would raise revenue on some transactions while reducing it elsewhere. “We want to get this done, but we want to do it right,” he said.

During her speech Thursday, Martinez said recent revenue estimates, although rosier than earlier ones, do not forecast enough available cash to pay all of the state’s bills.

“The state is running out of cash fast,” she said. “We certainly don’t want to write hot checks.”

But David Abbey, director of the Legislative Finance Committee, said during his own presentation Thursday that “liquidity is not an issue.”

He said the state has a sufficient cushion to pay its bills, and revenue seems to be on the upswing. He is worried, however, that the state does not have sufficient cash reserves to allow it to get by in the event of a significant economic decline.

Contention over Martinez’s budget vetoes is making tax-reform talk more difficult. Lawmakers have filed a legal challenge to her line-item vetoes, and a hearing before the state Supreme Court is set for May 15.

Lawmakers think they have the upper hand and would like to wait for a court ruling before reconvening. They probably won’t have that luxury.

Even if the Supreme Court overturned all the funding vetoes challenged by the Legislature, that would still leave a $70 million deficit for the next budget year that needs to be patched with more spending cuts or additional revenue. And that requires a special session.

Rep. Larry Larrañaga, R-Albuquerque, doesn’t think the Supreme Court will put the state in a position of having an unconstitutional deficit.

“I think we just ought to go back and fix it,” he said.

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