A Primer on New Mexico s Tax System

Transcription

1 A Primer on New Mexico s Tax System How it works, why it matters For: Albuquerque Interfaith Economic Summit March 28-29, 2008

2 All state services are funded by taxes Including: K-12 Education, Higher Education, Health Care, Public Safety

3 General fund spending $5.6 billion for FY 2008 Public Schools 45% Other Government 10% Other Health & Human Services 12% Public safety 7% Medicaid 11% Higher Education 15%

4 State spending increases every year Why must we spend an average of 7% more each year just to stay the same? New Mexico s population increases by about 1% per year Inflation - 3% per year Aging population Medicaid Program Public priorities change Pre - K Universal Health Care Coverage

5 A $184 million budget shortfall is expected next year To maintain current services in FY08, NM would need $364 million in new revenue. Because of the tax cuts, only $168 million in new revenue is anticipated : - $308 million needed $180 million expected = $184 million shortfall = Service cuts and/or increases in other taxes or decrease in general fund reserves

6 General fund revenue comes from numerous sources FY08 general fund revenue: All other 4% 2004 "revenue enhancers" 1% Income tax 26% Investment 12% Sales and excise taxes 44% Extraction 13%

7 What a good tax system should do: Provide adequate, stable revenue to consistently fund state services In a manner that is: Fair Administrable and efficient Accountable No hidden loopholes Transparent policymaking Balanced Promotes stability Distributes the responsibility broadly

8 Adequacy is the first priority Percent of general fund revenue: other taxes 71.4% personal income tax 27.1% alcohol excise tax 1.0% tobacco taxes 0.5% Income taxes provide lots of revenue Sin taxes don t

9 Public budgeting depends on stable Per capita tax collections revenue Income tax Severance tax Income taxes are stable Extraction taxes aren t

10 Revenue should grow at the rate of spending 10% Average annual growth rate ( ) 8% 6% 4% 8% Average annual spending growth 2% 0% -2% 3% personal income tax gross receipts tax tobacco products -4% -6% Personal income tax do Some excise taxes don t -4%

11 Equity Tax burden should be based on ability to pay People in similar circumstances should be taxed similarly. Taxes on low-income households should be minimized. Income taxes are the most equitable major state revenue source the only progressive source of state revenues.

12 No single tax is fair to everyone; but a fair tax system is possible Most states, including NM, have both a sales tax and an income tax Income tax is progressive Sales tax is regressive Combining the two yields: A more equitable system Lower rates overall Adequate, stable, consistent revenue

13 Measuring tax fairness Regressive taxes When less well-off people pay a higher percentage of their income in tax than do more well-off people the tax is called regressive. 16% 12% 8% 4% 0% 12% 8% 4% bottom 20% middle 20% top 20% Progressive taxes When less well-off people pay a smaller percentage of their income in tax than do more well-off people the tax is called progressive. 16% 12% 8% 4% 0% 12% 8% 4% bottom 20% middle 20% top 20%

14 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 Property tax Sales & excise tax

15 New Mexico s stool has four legs Sales and excise taxes Property tax Income tax Extraction taxes

16 New Mexico s tax system had a lot to recommend it. Progressive income tax Broad-based gross receipts tax Refundable credits Extraction taxes Centralized collection

17 Revenue adequacy Fairness to taxpayers It seems a fair assumption that poor states would have the hardest time bringing in adequate revenue to support their array of responsibilities. But that s not always the case. Take a look at New Mexico. It has more working poor than any other state, and its overall poverty rate is among the highest in the country. Yet its diverse tax structure serves it remarkably well. --Governing magazine, The Way We Tax, February 2003

18 The last few years have not been good for NM s stool Sales and excise taxes Property tax Income tax Extraction taxes

19 Damage to the income tax No longer adequate ($360 million less) Far less progressive Rate reduction -17,110-72, , , ,377 Capital gains ,297-15,622-20,336-27,442 Total cost -21,286-82, , , ,819 In 2008, when the income tax cut is fully phased in, a family with taxable income of $22,000 will pay the same tax rate as a family with taxable income of $600,000

20 State income taxes as a percent of family income by income class Before and after full phase-in of state income tax cuts 7% 6% 5% 4% 3% 2% No benefit 1.5% 1.4% 2.3% 2.0% 3.5% 2.9% 4.4% 3.2% 5.9% 4.0% Greatest benefit Average income (AGI) 1% 0% -1% 0.7% 0.7% -0.3% -0.3% lowest 20% second 20% $7,800 $18,300 middle 20% $28,700 fourth 20% $46,000 next 15% $79,100 next 4% $149,000 top 20% next 1% $611,000 Before cut After cut

21 Average NM income tax cut (2008) 14,000 by income class $13,227 12,000 10,000 8,000 6,000 4,000 $2,307 Income (AGI) brackets 2,000 0 $0 Less Than $16,000 $0 $16,000 - $29,000 $38 $29,000 - $45,000 $158 $45,000 - $72,000 $638 $72,000 - $138,000 $138,000 - $295,000 $295,000 or more phased in phased in

22 New Mexico s tax cuts mirror recent federal cuts Bush CUTS Reduces the overall tax responsibility on the richest 1% of Americans by more than 12% Richardson CUTS Reduces state income taxes for New Mexicans in the top tax bracket by more than 30% While the bottom 20% of Americans receive only a 3% tax reduction. Provides no tax relief at all for the bottom 20% of taxpayers.

23 NM and federal tax cuts in 2008 $25,000 $20,000 $21,204 $15,000 $13,227 $10,000 Income (AGI) brackets $5,000 $0 $597 $831 $70 $0 $306 $0 $38 $158 Less Than $16,000 - $29,000 - $45,000 - $16,000 $29,000 $45,000 $72,000 $1,737 $638 $72,000 - $138,000 $3,151 $2,307 $138,000 - $295,000 $295,000 or more Federal NM

24 Reductions in state taxes mean higher federal taxes State income taxes are deductible. When state taxes go down, itemized deductions go down. State tax reductions mean federal income tax increases. One third of the state tax break goes straight to the IRS

25 Income tax cuts damage New Mexico s economy State government cannot run a deficit. Tax cuts must be paid for with other tax increases and/or service cuts. Consultant to the Blue Ribbon Tax Reform Commission testified that the tax cut would cost NM jobs. Businesses value a skilled workforce more than tax breaks. Labor = 40% of business costs State taxes = 1% of business costs Retirees care more about health care than taxes.

26 Damage to the tax system Less balanced Less adequate More complicated Less transparent

27 State and local taxes as a percent of family income 14% by income class Before and after full phase-in of state income tax cuts No benefit 12% 10% 8% 6% 4% 12.1% 12.1% 11.1% 11.1% 10.4% 10.3% 9.5% 9.2% 8.5% 7.9% 7.3% 6.1% 6.3% 4.4% Greatest benefit 2% Average income (AGI) 0% lowest 20% second 20% middle 20% fourth 20% $7,800 $18,300 $28,700 $46,000 Before cuts After cuts next 15% $79,100 next 4% $149,000 top 20% next 1% $611,000

28 Next year... Possible service cuts Tax increases for some More tax cuts for others