by Raphael Pacheco, MBA
Dec. 27, 2017

Part 3 of our tax blog (read Part 1 here and Part 2 here) looks at how federal tax reform may impact New Mexico’s state budget.

Among other negative impacts of the Republican tax law, it could also cost the state budget more than $600 million a year if enacted as it currently stands. A federal budget law known as the Statutory Pay-As-You-Go (PAYGO) Act has a provision that if Congress passes a law that’s not paid for by new revenue, the government must implement mandatory sequestration cuts. This tax legislation will trigger sequestration for a large list of federal programs (see below) including New Mexico’s share of the funding from oil and gas extraction on federal lands.

Sequestrable base for all nonexempt mandatory programs for FY18, United States Federal Programs Sequestrable base (billions)
Medicare $637.9
    New Mexico Medicare payments $.18
Non-Medicare programs with base greater than $1 billion $71.7
Funds for Strengthening Markets, Income, and Supply, Agricultural Marketing Services $1.2
Farm price-support programs (Commodity Credit Corporation Fund) $13.7
Farm Security and Rural Investment programs $3.9
Concurrent Receipt Accrual Payments to the Military Retirement Fund $7.5
Rehabilitation services (Vocational Rehabilitation Basic State Grants) $3.5
Western Area Power Administration, Recovery Act $1.2
Risk adjustment program payments (Centers for Medicare & Medicaid Services) $1.9
Program Management (Centers for Medicare & Medicaid Services) $6.4
Social Services Block Grant $1.7
U.S. Citizenship and Immigration Services $4.1
U.S. Customs and Border Protection $1.3
National Flood Insurance Fund $1.6
Mineral leasing and associated payments to states $1.5
    New Mexico FML payments $.44
Assets Forfeiture Fund (DOJ) $1.6
Crime Victims Fund (DOJ) $13.5
Treasury Forfeiture Fund $1.3
Build America Bond payments, Recovery Act $3.9
Orderly Liquidation Fund (FDIC) $1.9
Non-Medicare programs with base less than $1 billion $20.3
All non-Medicare programs $92.0

Source: Center for American Progress Calculations using data from Office of Management and Budget

Currently, all revenues from oil, gas, and coal extraction are evenly split between the federal government and the state. New Mexico received $435.7 million in federal mineral lease payments for the 2017 fiscal year, which makes up about 7 percent of the state’s total revenues. The loss of this revenue, which primarily funds public education in New Mexico, would force the state to cut essential services.

The first row in the table above also includes sequestration cuts to Medicare that would further reduce federal payments to New Mexico by almost $178 million. When combined, the tax reform law will cost the state $600 million in revenue yearly.

Loss of the SALT deduction will rub sodium chloride in the budgetary wound

The GOP tax law will hinder the most valuable federal income tax deductions for New Mexicans, state and local income and sales taxes (SALT). The SALT deduction lets New Mexicans deduct their state and local income or sales taxes (whichever are greater) as well as their property taxes from their federal tax bill. Of course you have to itemize to take these deductions, which fewer middle-income people are likely to do. Wealthier people will still probably have an incentive to itemize, but the new tax package limits all SALT deductions for income and sales taxes at $10,000 as well as caps the deduction for property taxes at $10,000. This will likely harm New Mexico’s state budget because state income tax revenues grow with the economy while other taxes (like sales and excise) do not. The new cap will encourage New Mexico to lean more heavily on weaker revenue sources, likely raising insufficient revenues that lead to services being cut or eliminated. New Mexico could also respond by raising taxes or establishing fees that will fall less heavily on higher-income earners and more on middle-income earners.

To understand how SALT works, consider this example provided by the Center on Budget and Policy Priorities:

The SALT deduction is effectively a form of revenue sharing between the federal government and state and local governments. Consider a taxpayer in the 28 percent federal income tax bracket (someone who makes well over $100,000 annually). When a state raises $1 of additional revenue from this taxpayer, his overall taxes rise by only 72 cents because for that additional $1 in state tax payments, he or she can deduct 28 cents (28 percent). Without that deduction, high-income taxpayers would be less likely to support current state and local tax levels. Therefore, states and localities would struggle much more to raise revenue.

This would be especially hard on New Mexico as SALT deductions account for more than 60 of the total dollar amount (see tables below).

New Mexico US House District 1
Total Count of State Tax Returns 305,004
State/Local Income or Sales Tax Deduction  
Number of Returns 81,364
Amount Deducted ($1000s) $377,120
% of All Returns 26.7%
Total SALT Deduction  
Number of Returns 83,331
Amount Deducted ($1000s) $618,652
% of All Returns 27.3%
Income Sales/Deduction as a Percent of Total SALT Deduction 61.0%

New Mexico US House District 2
Total Count of State Tax Returns 255362
State/Local Income or Sales Tax Deduction  
Number of Returns 42,001
Amount Deducted ($1000s) $182,424
% of All Returns 16.4%
Total SALT Deduction  
Number of Returns 43,701
Amount Deducted ($1000s) $259,576
% of All Returns 17.1%
Income Sales/Deduction as a Percent of Total SALT Deduction 70.3%

New Mexico US House District 3
Total Count of State Tax Returns 272,196
State/Local Income or Sales Tax Deduction  
Number of Returns 64,755
Amount Deducted ($1000s) $322,038
% of All Returns 23.8%
Total SALT Deduction  
Number of Returns 67,030
Amount Deducted ($1000s) $482,881
% of All Returns 24.6%
Income Sales/Deduction as a Percent of Total SALT Deduction 66.7%

Source: IRS Statistics of Income, 2015 ZIP Code Data

The Biggest Factor in the GOP Tax Plan

What’s the bottom line of this tax plan? Who are the winners and who are the losers? Frankly readers, we lost again. Corporations won. Debunked trickle-down economic theory won. The wealthy won more. Cuts for corporations are massive and permanent and any cuts for you and me are miniscule and temporary. This legislation is not for middle-class tax relief. The priority, according to President Trump, was and always has been corporations. I mentioned in Part 1 of this blog that it is hard to argue otherwise. Corporations told Congress they were not going to use their tax cuts to raise wages and create more jobs. This tax reform legislation has been about benefitting corporations from the beginning because if this tax plan was truly designed to help working familiespeople like you and me who work 40 hours or more in a week with bills to pay and mouths to feed—it wouldn’t look like this. The holidays, regardless of whichever one you celebrate, are the season for giving. But in this particular spirit of giving, we’ll now be giving to corporations.

Raphael Pacheco is a Research and Policy Analyst with New Mexico Voices for Children.