New mexico s tax system
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New Mexico’s Tax System :. How It Works and Why It Matters to You. A Good Tax System Should:. Provide stable, adequate revenue to consistently fund state services; In a manner that is: Balanced (promotes stability) Fair (distributes the burden broadly)

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New mexico s tax system

New Mexico’s Tax System:

How It Works and Why It Matters to You


A good tax system should

A Good Tax System Should:

  • Provide stable,adequate revenue to consistently fund state services;

  • In a manner that is:

    • Balanced (promotes stability)

    • Fair (distributes the burden broadly)

    • Accountable (no hidden loopholes; transparent)

    • Administrable & Efficient (minimally expensive to collect, enforce and comply with)


New mexico s tax system

Thirty-eight states levy three general taxes: property, sales and income taxes. The “three-legged stool” approach to revenue policy is generally consistent with good tax policy principles.

Income tax

Sales & excise tax

Property tax


New mexico s stool has four legs

New Mexico’s stool has four legs

Extraction taxes

Income tax

Property tax

Sales and excise taxes


New mexico s tax system

Revenue : The money the state collects through taxes and interest on investments that pays for all state services

FY 2003 Revenue = $3.9 B

FY 2007 Revenue =

$5.5 B


Stable sources of revenue

STABLE sources of revenue:

  • Personal income taxes (PIT) – because they grow with population

  • Gross receipts taxes (GRT) – because they also grow with population and personal income; and, everyone purchases goods that are taxed


Unstable revenue sources

UNSTABLE revenue sources:

  • Extraction taxes – because these are subject to global market conditions outside of the control of New Mexico politics

  • Corporate income taxes (CIT) – because so much of the CIT in NM is also driven by oil and gas companies, whose profits, and therefore the taxes they pay, depend on the unstable oil and gas market


State revenue changes 2003 2007

State revenue changes 2003 - 2007

The percentages of taxes that contribute to state revenue changed in important ways from 2003 – 2007:

  • The percentage of revenue from personal income tax (PIT) decreased because of tax cuts made in 2003;

  • The percentage of revenue from extraction taxes – oil and gas – increased because of higher oil and gas prices;

  • The percentage of revenue from corporate income tax increased – again because of higher profits realized by oil and gas companies; estimates are that more than half - or $200M of the current CIT revenues are oil and gas related.


New mexico s tax system

Changes in the Stable Sources of State Revenue 2003 and 2007

In 2003, Personal Income Taxes were a greater share of revenue. The impact of the PIT 2003 tax cuts can be seen in the 2007revenue pie. In addition, the state eliminated estate taxes. GRT taxes also declined some, and the reliance on “unstable” revenue sources increased.

2007

2003


New mexico s tax system

Changes in the Unstable Sources of State Revenue 2003 and 2007

Oil and gas growth impacts several areas of state revenue, including rents and royalties, severance taxes and Corporate Income Taxes that are levied on companies that are oil and gas related. Corporate incomes taxes have risen from $100 M in 2003 to $400 M in 2007. Nonetheless, changes in the corporate tax laws to tax ALL businesses doing business in NM would be a good source of revenue. (Called “combined reporting”).

2007

2003


Summary so far

Summary so far….

  • Much of the state’s revenue is from taxes

  • There are different types of taxes

  • Some taxes are more stable, or dependable, than others

  • Recent changes in NM’s tax laws have resulted in greater dependence on unstable taxes


Once revenues are collected the legislature spends the money

Once revenues are collected, the legislature spends the money…


There are 2 ways the legislature spends the revenue or tax dollars that are collected

There are 2 ways the legislature spends the revenue, or tax dollars that are collected:

(1) by creating the “general fund budget” which appropriates money for the state agencies; and

(2) through tax expenditures– these are laws that provide exemptions, credits or deductions from taxes. The most familiar “tax expenditure” is the deduction for mortgage interest. If the state did not allow this deduction, then it could collect more taxes – thus, the mortgage deduction is an “expenditure” of tax dollars. Many of the laws allowing tax expenditures are never reviewed by the legislature once they are passed, so the expenditures continue year after year.


New mexico s tax system

General Fund Spending($5 Billion for FY 2007)

All State Services Are Funded By Taxes:

60%


New mexico s tax system

To Maintain Current Levels Of Services

State Spending Must Increase By At Least 7% Each Year

  • Inflation increases costs – 6% per year

  • New Mexico’s population grows by about 1% per year

  • An aging population utilizes services

  • Public priorities change and require additional funding (e.g., corrections or full-day kindergarten)


What s happened to the general fund since 2003

What’s happened to the general fund since 2003?


How have state agency budgets changed since 2003

How have state agency budgets changed since 2003?


What does all of this mean

What does all of this mean?

  • The general fund budget has grown at about the same rate as the state economy for the last few years

  • Most state agency budgets remain the same year-to-year as a share of the total budget for that year

  • EXCEPTIONS are Medicaid, which has grown every year and HIGHER ED which has decreased as a share of the total - other state agency budgets remain flat

  • The operating budget, or general fund, remains almost a constant percentage of personal income at about .085%


And what does all of that mean

And what does all of THAT mean?

  • State government is not growing at a rampant rate

  • Because state agency budgets remain flat, one interest gets pitted against another in the appropriations wars

  • If we believe the state needs more services, we need to increase the TOTAL operating budget


To increase the total operating budget we can

To increase the total operating budget, we can:

  • Raise taxes

  • Reduce tax expenditures

  • Or, do both


New mexico s tax system

In addition to spending money on the state agency budgets – or the general fund budget – there are tax expenditures – credits, deductions and exemptions from the tax base.


New mexico s tax system

Summary: Exemptions and Deductions from NM Gross Receipts and Compensating Taxes

  • Gen. FundLocalTotal

  • Social Policy/ Economic Development: $184.6$45$242.2

  • Governmental Family$45$30$75

  • Interstate Trade Family$23$12$35

  • Nonprofit Organizations Family$114.3$76.5$190.8

  • Taxes paid under other programs$1,759$1,146$2,905

  • Agricultural Family$17$7$24

  • Food Stamps Pre-emption$7$5$12

  • Manufactured Products Family$107$46$153

  • Property for re-sale$463.3$300$763.3

  • Lease for re-Sale Family$13$4$17

  • Construction Materials and Services Family$48$32$80

  • Real property family$266$171$437

  • Total$3047.2$1887 $4934.3


  • Tax expenditures are important

    Tax expenditures are important :

    What’s left after the tax expenditures is the revenue that makes up the state general fund.


    Tax expenditures are a way of spending money

    Tax expenditures are a way of spending money!

    We need to look at the whole picture – tax expenditures as well as the general fund spending.


    New mexico s tax system

    Adequacy:

    A tax system should generate adequate, stable revenue to consistently fund state services


    New mexico s tax system

    Because of the PIT cuts in 2003 and the heavy reliance on extraction taxes,our tax system is no longer stable and adequate.In coming years, if revenues are not enough to support state spending….


    New mexico s tax system

    Taxes Must Be Increased


    New mexico s tax system

    OR …

    Services Must Be Cut


    New mexico s tax system

    OR…

    We can examine our tax expenditures to make sure they meet our public policy goals.


    Finally a good tax system should be fair

    Finally, a good tax system should beFAIR


    New mexico s tax system

    Fairness

    A tax system should distribute the tax burden broadly, with those in higher income brackets paying more


    New mexico s tax system

    The personal income tax cuts

    reduced the tax burden of New Mexico’s wealthiest citizens while benefiting middle class and lower income families very little or not at all.

    Greatest benefit

    No benefit

    State Income Taxesbefore and after full phase-in of tax cuts

    Tax Rate

    top 20%

    Income Level


    New mexico s tax cuts mirror recent federal cuts

    Reduces the overall tax burden on the richest 1% of Americans by over 12%

    While the bottom 20% of Americans receive only a 3% tax reduction.

    Reduces state income taxes for New Mexicans in the top tax bracket by over 30%

    Provides no tax relief at all for the bottom 20% of taxpayers.

    New Mexico’s tax cuts mirror recent federal cuts

    NM CUTS

    BUSH CUTS


    New mexico and federal tax cuts in 2007 who benefits

    New Mexico and Federal Tax Cuts in 2007:Who Benefits


    What does all of this mean1

    What does all of this mean?

    • Understanding the state tax system is critical for all advocates of social programs.

    • Some taxes are better than others.

    • The state general fund is growing at about the rate of state personal income.

    • Tax expenditures are very important because they are often unexamined and are a potential source of revenue that could be available to spend on programs and services.


    Some policies to consider

    Some policies to consider…

    A Tax Expenditure Report

    What is it? A report prepared annually by the tax and revenue department, detailing the tax expenditures, and their costs.

    Why is it a good idea? Because the legislature and the public need an accountability system for tax expenditures, which should be part of the budget debate process.

    How much will it cost? The tax department would do this report, so the cost should be minimal.


    New mexico s tax system

    • A state Earned Income Tax Credit

      What is it? A credit, or payment, that low income working families get when they file their taxes.

      Why is it a good idea? Upper income tax payers received huge state and federal tax cuts, and a state EITC would help low income earners, making our tax system a little more progressive.

      How much would it cost? At 10% of the value of the federal EITC, it would cost about $37 M.


    New mexico s tax system

    What You Can Do

    Educate (colleagues, members, policymakers, the media, neighbors)

    Advocate for fair, adequate and transparent tax policy. This session, argue for tax expenditure reports so we know how much the credits, deductions and exemptions cost us.

    Talk to your legislators (to find out who your representatives are and how to contact them go to Get Activeat www.nmvoices.org


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