New Mexico’s Tax System:
How It Works and Why It Matters to You
1
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)
2
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
3
New Mexico’s stool has four legs
Sales and
excise taxes
Property
tax
Income tax
Extraction
taxes
4
Revenue : The money the state collects
through taxes and interest on investments
that pays for all state services
Rents &
Roylt's
7%
Severance
Taxes
7%
Rents &
Roylt's
9%
New taxes &
Misc.
6%
GRT and
Comp.
35%
Income tax
26%
Interest
12%
FY 2003 Revenue =
$3.9 B
Selective
Sales
7%
New taxes
& Misc.
2%
Severance
Taxes
8%
Income tax
28%
GRT and
Comp.
34%
Interest
12%
Selective
Sales
7%
FY 2007 Revenue =
$5.5 B
5
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
6
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
7
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.
8
Changes in the Stable Sources of
State Revenue
2003 and 2007
GRT &
Comp., 35%
GRT &
Comp.,
34%
PIT, 23%
All Other,
Unstable
sources 42%
Estate,
0.40%
2003
PIT, 20%
All Other,
Unstable
sources
46%
Estate, 0%
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.
9
Changes in the Unstable Sources of
State Revenue
2003 and 2007
Severance
Taxes, 8%
Severance
Taxes, 7%
Interest, 12%
Interest, 12%
Rents &
Royalties,
7%
CIT, 3%
Stable
revenue
71%
2003
stable
revenues,
64%
Rents and
Royalties,
9%
CIT, 7%
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”).
10
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
11
Once revenues are collected,
the legislature spends the
money…
12
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.
13
General Fund Spending
($5 Billion for FY 2007)
All State Services Are Funded By Taxes:
Other
Government
10%
Public
Schools
45%
Other Health
& Human
Services
12%
Medicaid
12%
60%
Higher
Education
15%
Public Safety
6%
14
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)
15
What’s happened to the general fund since 2003?
FY 2003 FY 2004 % Increase FY 2005 % Increase FY 2006 % Increase FY 2007 % Increase
Total General
Appropriations Act $3.886B $4.105B
5.6%
$4.378B
6.7%
$4.678B
6.9%
$5.071B
8.40%
16
How have state agency budgets changed since 2003?
F Y 2003
o pe ra t ing
budge t
s ha re o f
to tal
budge t
F Y 2004
o pe ra t ing
budge t
s ha re o f
to tal
budge t
s ha re o f
to tal
budge t
F Y 2006
o pe ra t ing
budge t
s ha re o f
to tal
budge t
$ 3.1M
0.1%
$ 3.5 M
0.1%
$ 6.6 M
0.2%
$ 3.4 M
0.1%
$ 3.6 M
0.1%
J udic ia ry
$ 131.5 M
3.4%
$ 138.5 M
3.4%
$ 147.5 M
3.4%
$ 161.5 M
3.5%
$ 170.3 M
3.4%
G e ne ra l C o nt ro l
$ 135.50
3.5%
$ 136.2 M
3.3%
$ 145.3 M
3.3%
$ 150.4 M
3.2%
$ 157.6 M
3.1%
C o m m e rc e & Indus t ry
$ 45.7 M
1.2%
$ 47.9 M
1.2%
$ 49.5 M
1.1%
$ 46.7 M
1.0%
$ 49.9 M
1.0%
A g. E ne rgy & N a t .R e s o urc e s s
$ 59.1M
1.5%
$ 59.0 M
1.4%
$ 65.0 M
1.5%
$ 68.9 M
1.5%
$ 72.3 M
1.4%
H e a lt h, H o s pit a ls , H um a n S v c
A ging & Lo ng Term Care
$ 831.2 M
$ 20.8 M
21.4%
0.5%
$ 914.0 M
$ 21.6 M
22.3%
0.5%
$ 1,010.3 B
$ 23.5 M
23.1%
0.5%
$ 1,115.6 B
$ 36.8 M
23.8%
0.8%
$ 1,212.9 B
$ 41.0 M
23.9%
0.8%
Human Services Dept .
$ 414.5 M
10.7%
$ 471.4 M
11.5%
$ 544.3 M
12.4%
$ 626.2 M
13.4%
$ 684.2 M
13.5%
(M edical A ssistance)
$ 345.8 M
8.9%
$ 418.8 M
10.2%
$ 486.7 M
11.1%
$ 569.6 M
12.2%
$ 625.8 M
12.3%
$ 38.0 M
1.0%
$ 38.0 M
0.9%
$ 39.8 M
0.9%
$ 43.6 M
0.9%
$ 42.7 M
0.8%
$ 232.8 M
6.0%
$ 248.8 M
6.1%
$ 258.70
5.9%
$ 273.7 M
5.9%
$ 285 M
5.6%
$ 14.2 M
0.4%
$ 14.3 M
0.3%
$ 14.8 M
0.3%
$ 13.5 M
0.3%
$ 14.1M
0.3%
$ 133.2 M
3.4%
$ 140.2 M
3.4%
$ 150 M
3.4%
$ 145.2 M
3.1%
$ 165.5 M
3.3%
P ublic S a f e t y
$ 270.2 M
7.0%
$ 280.8 M
6.8%
$ 288.8 M
6.6%
$ 296.1M
6.3%
$ 323.0 M
6.4%
Co rrectio ns
$ 194.1M
5.0%
$ 202.5 M
4.9%
$ 207.6 M
4.7%
$ 213.9 M
4.6%
$ 237.1M
4.7%
P ublic Safety
$ 69.5 M
1.8%
$ 70.9 M
1.7%
$ 73.5 M
1.7%
$ 74.4 M
1.6%
$ 77.1M
1.5%
H ighe r E duc a t io n
$ 601.7 M
15.5%
$ 641.6 M
15.6%
$ 671.9 M
15.3%
$ 707.7 M
15.1%
$ 759.2 M
15.0%
P ublic S c ho o l S uppo rt
$ 1,788.6 B
46.0%
$ 1,863.3 B
45.4%
$ 1,986.4 B
45.4%
$ 2,119.0 B
45.3%
$ 2,280 B
45.0%
$ 20.0 M
0.5%
$ 20.4 M
0.5%
$ 6.9 M
0.2%
$ 9.4 M
0.2%
$ 14.9 M
0.3%
10 0 .0 %
S t a t e B udge t C a t e go ry
…... State A gency
…
…
…
…
..
budget)
Le gis la t ure
F Y 2005
o pe ra t ing
budge t
F Y 2007
o pe ra t ing
budge t
s ha re o f
to tal
budge t
(divisio n
( Inco me Suppo rt)
Health Dept.
Enviro nment Dept
CYFD
O t he r E duc a t io n
T o t a l A ppro pria t io ns A c t
$ 3 ,8 8 6 .6 B
$ 4 ,10 5 .1 B
$ 4 ,3 7 8 .5 B
$ 4 ,6 7 8 .5 B
$ 5 ,0 7 0 .8 B
N M P e rs o na l Inc o m e ( P I)
$ 4 5 .7 B
$ 4 8 .6 $
$ 5 2 .4 B
$ 5 4 .7 B
$ 5 9 .2 B
0 .0 8 5
0 .0 8 4
0 .0 8 4
0 .0 8 4
0 .0 8 6
O pe ra t ing B udge t a s % o f P I
17
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-toyear 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%
18
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
19
To increase the total operating
budget, we can:
• Raise taxes
• Reduce tax expenditures
• Or, do both
20
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.
21
Summary: Exemptions and Deductions from NM Gross Receipts and
Compensating Taxes
»
•
•
•
•
•
•
•
•
•
•
•
•
•
Social Policy/ Economic Development:
Governmental Family
Interstate Trade Family
Nonprofit Organizations Family
Taxes paid under other programs
Agricultural Family
Food Stamps Pre-emption
Manufactured Products Family
Property for re-sale
Lease for re-Sale Family
Construction Materials and Services Family
Real property family
Total
Gen. Fund
Local
$184.6
$45
$23
$114.3
$1,759
$17
$7
$107
$463.3
$13
$48
$266
$3047.2
$45
$30
$12
$76.5
$1,146
$7
$5
$46
$300
$4
$32
$171
$1887
Total
$242.2
$75
$35
$190.8
$2,905
$24
$12
$153
$763.3
$17
$80
$437
$4934.3
22
‼Tax expenditures are
important :
What’s left after the
tax expenditures is
the revenue that
makes up the state
general fund.
23
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.
24
Adequacy:
A tax system should generate
adequate, stable revenue to
consistently fund state services
25
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….
26
Taxes Must Be Increased
Increase Sales and
Excise Taxes
???
New "Sin" Taxes
???
Extraction tax
revenue depends on oil
and gas
NM's flat income tax
could be raised
Investment incomeas reserves go down,
so will investment $$$
27
OR …
Services Must Be Cut
Other
Government
Fewer public
health clinics?
Less $$$ for
Public Schools
Public Safetly
Medicaid cuts?
Eldely?
Disabled?
Higher
Education $$$
reduced
28
OR…
We can examine our tax
expenditures to make sure
they meet our public policy
goals.
29
Finally, a good tax system should
be
FAIR
30
Fairness
A tax system should distribute
the tax burden broadly, with those
in higher income brackets paying
more
31
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.
7%
State Income Taxes
before and after full phase-in of tax cuts
6%
5%
Greatest
benefit
4.4%
4%
3.5%
4.0%
3.2%
2.9%
3%
2%
5.9%
2.3%
No benefit
0.7%
1%
-0.3%
1.5%
2.0%
1.4%
0.7%
-0.3%
0%
-1%
lowest 20%
$7,800
second 20%
$18,300
middle 20%
$28,700
fourth 20%
$46,000
next 15%
$79,100
next 4%
$149,000
next 1%
$611,000
top 20%
Before cut
After cut
Income Level
32
New Mexico’s tax cuts mirror
recent federal cuts
BUSH 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.
NM CUTS
• 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.
33
New Mexico and Federal Tax Cuts in 2007:
Who Benefits
$25,000
$21,204
Federal Tax Cuts 2007
$20,000
$15,000
$13,227
$10,000
$5,000
$3,151
$70
$0
$0
Less Than
$16,000
$306
$0
$16,000 $29,000
$597
$38
$29,000 $45,000
$831
$1,737
$638
$158
$45,000 $72,000
$72,000 $138,000
$2,307
$138,000 - $295,000 or
$295,000
more
Income Level
Federal
NM
34
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.
35
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.
36
• 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.
37
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 Active at www.nmvoices.org
38