Environment, Recent Tax Law Changes, Recent Dialogue, Likelihood, and Expected New Tax Proposals Presented to the Economic Forum

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1 New Mexico s Economic and Fiscal Environment, Recent Tax Law Changes, & Recent Dialogue, Likelihood, and Expected New Tax Proposals Presented to the Economic Forum Decemb er 16, 2010 RICHARD L. ANKLAM, PRESIDENT & EXECUTIVE DIRECTOR

2 NMTRI Principles of Good Tax Policy 2 is a non-profit, non-partisan member- supported organization dedicated to advancing the following principles of good tax policy in New Mexico: Adequacy Revenues enues should be sufficient to fund needed services Efficiency Interference with the private economy should be minimized Equity Taxpayers should be treated fairly Simplicity Laws, regulations, forms and procedures should be as simple as possible Comprehensiveness All taxes should be considered when evaluating the system Accountability Exceptions should be rare and should be carefully evaluated and justified

3 Economic Environment 3 FY 2007 State Tax Revenues Gross Receipts Tax 35% Insurance Premiums Tax 2% Other Taxes 5% Personal Income Tax 30% Property Taxes 1% Severance Taxes 16% Tobacco Taxes 1% Corporate Income Tax 5% Fuel Taxes 5%

4 Economic Environment FY 2007 New Mexico Municipal Tax Revenues 4 Gross Receipts Tax 80% Property Tax 12% Cigarette Tax 1% Gasoline Tax 1% Lodgers Tax 1% Franchise Tax 3%

5 Economic Environment FY 2007 New Mexico County Tax Revenues 5 Property Tax 55% Cigarette Tax 0% Gasoline Tax 1% Lodgers Tax 0% Motor Vehicle Excise Tax 1% Franchise Tax 5% Gross Receipts Tax 43%

6 Economic Environment REVENUE FOREAST - NOT PRETTY 6 Shortfall could still get worse (although recent forecast improved) Federal stimulus money going away Governor released worst numbers than the consensus Differing assumptions (i.e. Guv didn t assume continuation of austerity measures) Medicaid is biggest question

7 Economic Environment 7 Source: December 2010 Consensus Revenue Forecast

8 Economic Environment 8 Source: December 2010 Consensus Revenue Forecast

9 Economic Environment 9 Source: December 2010 Consensus Revenue Forecast

10 Economic Environment 10 Source: December 2010 Consensus Revenue Forecast

11 Economic Environment 11 Source: December 2010 Consensus Revenue Forecast

12 Economic Environment 12 Source: December 2010 Consensus Revenue Forecast

13 Economic Environment % Annual Growth Rates by Revenue 20.0% 10.0% 0% Gross receipts tax 0.0% Personal income tax -10.0% Corporate income tax -20.0% Energy-related revenues -30.0% -40.0% FY10 FY11 FY12 FY13 FY14 Source: July 2010 Consensus Revenue forecast. All revenues fell in FY10, O&G revenue fell sharply Strong recovery expected for CIT, O&G Moderate growth in PIT, GRT, Other Sales Tax

14 Economic Environment % 14 Oil & Gas Production Trends % % 95.00% 2000 = 100% 90.00% 85.00% 80.00% 75.00% 70.00% 65.00% 60.00% 00% Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Source: ONGARD system Gas production decline accelerated in the last 2 years Partly due to more liquids processing Oil production appears more stable

15 Economic Environment- Rate Growth and Pyramiding % 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% Albuquerque Las Cruces Farmington Santa Fe Rio Rancho Roswell Alamagordo Clovis Hobbs 5.0%

16 Economic Environment- Rate Growth and Pyramiding What is pyramiding? 16 Pyramiding is when a general consumption or transaction tax (like a sales tax or the NM gross receipts tax) is charged on business inputs (business-to-business sales) and becomes embedded as part of the cost of the ultimate goods or services sold to the consumer.

17 Political Environment 17 Broadening discussion of budget cuts and tax increases Shortfall too lengthy for kick the can strategies alone Social advocacy groups, religious groups and unions calling for more business and income taxes, less budget cuts Business advocacy and others calling for greater focus on gov t spending reductions and no tax increases targeting business

18 Political Environment Most agree cuts are still necessary Many feel tax increases may be necessary or inevitable Governor-elect Martinez has promised to not raise taxes or cut education OR Medicaid (NOT GOING TO WORK OUT THAT WAY) Debate: If taxes are to be raised, which taxes and how much? (similar il questions on expenditure side) 18

19 Tax Policy Issues Taxes are necessary in that they pay for public services, but: Taxes can cause economic distortions, inefficiencies, and inequitiesi i 19 Economic implications of different tax increase proposals vary The state needs to minimize negative impact of increased taxes on job creation as well as impacts on the most vulnerable

20 Tax Proposals 20 Include most significant tax programs Are often retreads of previous proposals Don t represent the only options Endless options/ variations on a theme possible Some options from blue ribbon tax reform commission and Guv s budget balancing committee Include compliance enhancement proposals p that don t raise taxes Use terms like loophole to avoid increasing taxes

21 Passed Tax Proposals Regular Session Tax Credits and Other Measures Las Cruces Tax Increment Project (HB 112) Transport of Dairy Waste for Gas Tax Credit (HB 171) Business Retention Gross Tax & Gaming Tax (HB 203) Withholding Tax Changes (PTE/O&G) (HB 120) Solar & Wind Energy Equipment Gross Receipts (HB 261) Economic Development Tax Incentive Changes (SB 47) Affordable Housing Tax Credit Use & Vouchers (SB 144) County Gross Receipts for Certain Projects (SB 162)

22 Passed Tax Proposals SS Senate Finance Committee Substitute for Senate Bill 10, 12 & 13 non-vetoed portions: increased the statewide gross receipts and compensating tax rates by one-eighth percent (a/o 7/1/10), / required the add-back of state income and sales taxes itemized and deducted on federal returns for state income tax purposes (a/o tax year 2010), and closed a hole in the compensating tax. VETOED - food and LICTR Related Provisions The total general fund revenue generated by the bills is approximately $137.5 million in FY11, and $122.5 million in FY12 post veto (previously $200 million).

23 Passed Tax Proposals SS 2010 House Taxation and Revenue Committee Substitute for House Bill 3 - non-vetoed portions: Increased cigarette tax by 75 cents Changes distributions to hold some beneficiaries harmless 23 VETOED existing distributions to local governments and new distributions tions to the PED for early childhood education and CYFD for early childhood programs The total general fund revenue generated by the bill is approximately $33.9 million post veto, (previously $22.5 million).

24 Tax Proposals-Personal Income Tax 24 Roll Back Richardson Tax Cuts PIT We raised personal income taxes this year already Tax rate surcharge at varying income levels NM rates similar to surrounding states currently Reduce capital gain tax preference (PIT) NM more generous than most states assuming current rate structure

25 Tax Proposals - Corporate Income Tax 25 Impose mandatory combined reporting New Mexico has long allowed three options for reporting corporate income as an economic development incentive Separate corporate entity Unitary combined Federal consolidated NM currently imposes highest rates and least favorable reporting rules relative to surrounding states, but for filing group elections

26 Tax Proposals - Gross Receipts Tax 26 Increase GRT rates Already increased GRT and Compensating Tax by 1/8% Negative Consequences to business and poor alike Eliminate or alter hold harmless provisions Repeal or alter food tax deduction Candy & soda Provision passed and vetoed this year Other?

27 Oil and gas taxes Other Taxes 27 Equalize oil and gas tax rates Progressive rate structure Impose higher sin taxes Alcohol Already raised cigarettes 75 cents/pack Increase gasoline taxes Tax currently goes to road fund

28 Other Taxes 28 Motor vehicle excise tax NM low at 3% with little ED implication Turnover tax so rate should be less than GRT Sector still in downturn. Insurance premiums tax Increase health premiums 1% Many health services now out of GRT base Retaliatory taxes

29 Always scrutinized Business Incentives In total cost under $94M, down from over $120M Many used little and repeal offers little savings Utilized incentives enjoy support New sunsets and clawbacks possible, as are caps, benefits reduction, and repeal 29 Note: Film Credit more costly than all other business incentives combined and represent approx. 70% of expenditures on business tax credits

30 Business Incentives 30 Film credit $76M in 2009 High wage jobs tax credit $14M in 2009 Technology jobs tax credit $6M in 2009 Renewable energy production tax credit $15M in 2008; 0 in 2009 Investment credit $11M in 2009

31 Other Taxes Uranium and Coal Taxes 31 Repeal coal surtax exemption Not general fund revenue source Increase uranium tax No uranium mining currently taking place in NM Estate Taxes Wait for Federal rules? De-couple from federal credit

32 Non-Tax Revenue Enhancement Proposals 32 Varying means of converting capital money to general fund operating funds Rate swap OGEST with Severance Sponge bonds Trade capital for operating (pork=construction) Permanent endowment fund Already paying out more than taking in; lost over $1 billion in the last quarter Requires Constitutional Change Alternative Sell Note to P-Funds as Investment Essentially borrowing money from future

33 Summary 33 Revenue/budget situation uncertain but remains bleak Taxes increase proposals WILL be introduced Taxes increases of some sort are likely (although they may not be called that) How you tax matters do the least harm