News Column

Report: Business Tax Credits Cost NM $48 million in 2012

Jan 29, 2013

Bruce Krasnow

Gov. Susana Martinez

New Mexico's tax credit for businesses that create high-wage jobs was front and center in a recent report about tax policy gone wrong.

The incentive cost the state $9.3 million in 2011, but quintupled to $48 million last year, according to the Pew Center report "Avoiding Blank Checks."

"That might have been a positive development if it signaled an economic boom and showed the credit was working," the report stated. "Instead what happened is that businesses were learning they could claim a credit for jobs they had created years earlier without knowing about the tax credit." Specifically, companies were allowed to go back and claim up to $12,000 for employees that had already been on the payroll as far back as seven years. "It meant some companies were receiving a financial benefit for something they would have done anyway," Pew concluded.

Passed in 2004, the high-wage tax break -- and hundreds of others still on the books in New Mexico -- is now being scrutinized by the Legislature as part of a move to reduce the state's corporate income tax. The tax breaks include the back-to-school sales tax holiday passed in 2005; the GRT exemption for newspaper sales passed in 1969; as well as renewable energy breaks and sales tax breaks for private hospitals, and others. Reducing or eliminating some of the tax breaks would raise enough money to reduce the tax bracket on businesses.

Santa Fe Democrat Rep. Luciano "Lucky" Varela says it's a way to meet Gov. Susana Martinez halfway in her effort to reduce the income tax on business and make New Mexico more competitive. "We need to broaden the GRT across the board, then lower the corporate rate. We need to look at tax breaks that were granted but never sunset. Let's compromise," he said.

Gov. Martinez and Economic Development Secretary Jon Barela said the highest corporate rate should be reduced to to 4.9 percent from 7.6 percent so it equals Arizona.

In a presentation last week to the Santa Fe Chamber of Commerce, Barela said there is more urgency now as both Louisiana and Florida are considering eliminating the corporate income tax altogether. And Kansas, Oklahoma and Virginia are looking at reducing income taxes and cutting narrow tax exemptions in favor of boosting the more broad-based sales taxes, according to The New York Times, which said the issues characterized "a debate over what kind of tax system most encourages -- or least discourages -- growth in a 21st-century economy."

The corporate income tax raises $350 million a year for New Mexico's general fund, which pays for education, health, courts, criminal justice, public safety and other government services, but it is still a small percent of the $5.9 billion state operating fund.

"I think we need a sense of urgency in creating economic opportunities in this state," Barela told Santa Fe business leaders. "We need to get in the ballgame."

But estimates released this week indicate the cost to the general fund will be $131 million when the corporate income tax measure is fully phased in after three years. The other big initiative by the governor is a so-called single-weighted sales factor tax, where companies can choose to be taxed on just a portion of their operations. Both of those combined will cost the general fund $220 million when fully phased in, according to the Department of Finance and Administration.

State Sen. George Munoz, a small-business owner and developer, has been a strong supporter of Barela's efforts and is the prime sponsor of the measure in the Senate (Senate Bill 277). With federal budget cuts going forward later this year, Munoz, a Gallup Democrat, also feels the urgency. "Our economy is going to go in the tank," he said. "There's not just one single thing that's going to change the economy of New Mexico," adding that the Legislature and governor need to move together to make New Mexico more competitive.

Still, Munoz said Martinez's tax bill is unlikely to pass without offsets that protect the general fund. He and other senators support a measure by Peter Wirth that passed the Legislature last year, but was vetoed by Martinez. It would require companies to report all their sales from out-of-state affiliates to New Mexico for taxation -- a concept known as combined reporting.

Wirth, D-Santa Fe, has a bill this year (SB 13) that again incorporates both the corporate tax cut with combined reporting as a way to level the playing field for all businesses -- smaller family-owned firms and larger companies that come from out of state.

"There have been general discussions about a corporate tax reform package which would include combined reporting and elimination of other exemptions to offset the fiscal impact of a straight rate reduction," Wirth said in an email. "While there is a real opportunity here to broaden the tax base and lower rates, we need to be extremely careful about the fiscal impact."

New Mexico has hundreds of tax credits and exemptions that have been on the books for years. The high-wage jobs credit for jobs that pay $60,000 or more a year is one example of one that was put in place but never closely monitored, according to the Pew report.

Richard Anklam, executive director of the New Mexico Tax Research Institute, said the credit for high-wage workers was always flawed because it lacked a time limit on when employers could claim the money for the new job. There were failed attempts the last two sessions to fix that, which in turn brought more attention to the problem, which resulted in more claims on the money.

"It's not a secret anymore. The fixes didn't happen, so the problem got worse," he said.

A bill introduced by state Sen. Phil Griego, D-San Jose, is aiming to get the fixes right this session. Griego's bill (SB 211) specifies that any job receiving the high-wage credit must be created in the same tax year it is being claimed and the position must be an added job, not one replacing someone who left or a contract position. Is also specifies the credit can't be claimed for jobs that result from a merger or acquisition. And the Griego bill mandates that the job be in New Mexico -- not just for a company based here with offices elsewhere.

The changes would reduce the credit by $4.2 million a year, and Gov. Martinez supports it, said Angela Heisel, a spokeswoman for the Economic Development Department.

But Barela told the Santa Fe Chamber that he does not want to see the tax cut become a "balloon squeeze," where businesses get broad-based tax relief and then nickel-and-dimed in other costs.

He sees the general fund making up the shortfall with more business recruitment and growth.

But Varela and others are skeptical. "That's not going to happen overnight. How long does it take?" he said. With the high-wage tax credit, "we underestimated the impact substantially. How do we make up those dollars?"

Still another bill (SB 59) by Sen. Carlos Cisneros, D-Questa, does it all. He suggests incorporating all the corporate income tax changes from Gov. Martinez and Wirth and then repealing the major credits, including the high-wage credit, the rural-job tax credit, the investment credit, the technology-jobs tax credit and the research and development small-business tax credit. There are some $1 billion in tax breaks or credits now on the books. The measure would seek to eliminate many, and in turn lower the brackets for everyone.

Anklam said tax reform often gets done when elected officials want to do something significant -- as Martinez is proposing now. But it's extremely difficult to do the detail work amid a legislative session.

For instance, the personal income exclusion for 50 percent on capital gains -- one of the breaks being analyzed by House Democrats -- was put in place by former Gov. Bill Richardson with the goal of making the personal income tax rate more competitive with other states. And when there are proposals to eliminate or change the tax breaks, lobbyists and industry executives show up to work against that.

"There are pros and cons to every exclusion you have out there," Anklam said, but "there is often no time or energy or bandwidth to do it in the middle of a session. It sounds like someone threw some ideas out there to get a conversation going."

And any revenue measures still need to get past Martinez. "Our high-wage jobs credit bill will substantially improve targeting of the credit, which will effectively reduce the fiscal impact," said Tom Clifford, Finance and Administration chief for the governor. "Other than that, we are not proposing any revenue raising provisions."

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Distributed by MCT Information Services



Source: (c) 2013 The Santa Fe New Mexican (Santa Fe, N.M.)


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