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How It Works and Why It Matters to You

New Mexico’s Tax System:

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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)

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Income tax Property tax Sales & excise tax

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.

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New Mexico’s stool has four legs

Sales and excise taxes

Property tax

Income tax

Extraction taxes

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Revenue : The money the state collects through taxes and interest

on investments that pays for all state services

GRT and Comp.35%

Selective Sales7%

Interest12%

Income tax26%

Severance Taxes

7%

Rents & Roylt's

7%New taxes & Misc.

6%

FY 2003 Revenue =

$3.9 B

FY 2007 Revenue = $5.5 B

GRT and Comp.34%

Selective Sales7%Interest

12%

Income tax28%

Severance Taxes

8%

Rents & Roylt's

9%

New taxes & Misc.2%

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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

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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

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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.

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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.

PIT; 23%

All Other, Unstable sources 42%

Estate; 0%

GRT & Comp.; 35%

PIT; 20%

All Other, Un-stable sources

46%

GRT & Comp.; 34%

2003

Changes in the Stable Sources of State Revenue

2003 and 2007

2007

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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”).

Severance Taxes; 7%

Interest; 12%

Rents & Royal-ties; 7%

CIT; 3%

Stable revenue 71%

Severance Taxes; 8%

Interest; 12%

Rents and Royalties; 9%

CIT; 7%

stable rev-enues, 64%

2007

Changes in the Unstable Sources of State Revenue 2003 and 2007

2003

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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

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Once revenues are collected, the legislature

spends the money…

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(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.

There are 2 ways the legislature spends the

revenue, or tax dollars that are collected:

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All State Services Are Funded By Taxes:

60%

General Fund Spending

($5 Billion for FY 2007)

Other Government10%

Other Health & Human Services

12%

Medicaid12%

Public Safety

6%Higher Education

15%

Public Schools

45%

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• 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)

To Maintain Current Levels Of Services State Spending Must Increase By At Least 7%

Each Year

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What’s happened to the general fund since 2003?

FY 2003 FY 2004 % Increase FY 2005 % Increase FY 2006 % Increase FY 2007 % Increase

$3.886B $4.105B 5.6% $4.378B 6.7% $4.678B 6.9% $5.071B 8.40%Total General Appropriations Act

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How have state agency budgets changed since 2003?

Legislature $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 udiciary $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%

General Control $135.50 3.5% $136.2 M 3.3% $145.3 M 3.3% $150.4 M 3.2% $157.6 M 3.1%

Commerce & Industry $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%

Ag. Energy & Nat.Resourcess $59.1 M 1.5% $59.0 M 1.4% $65.0 M 1.5% $68.9 M 1.5% $72.3 M 1.4%

Health, Hospitals, Human Svc $831.2 M 21.4% $914.0 M 22.3% $1,010.3 B 23.1% $1,115.6 B 23.8% $1,212.9 B 23.9% Aging & Long Term Care $20.8 M 0.5% $21.6 M 0.5% $23.5 M 0.5% $36.8 M 0.8% $41.0 M 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%

(Medical Assistance) $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%

( Income Support) $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%

Health Dept. $232.8 M 6.0% $248.8 M 6.1% $258.70 5.9% $273.7 M 5.9% $285 M 5.6%

Environment Dept $14.2 M 0.4% $14.3 M 0.3% $14.8 M 0.3% $13.5 M 0.3% $14.1 M 0.3%

CYFD $133.2 M 3.4% $140.2 M 3.4% $150 M 3.4% $145.2 M 3.1% $165.5 M 3.3%

Public Safety $270.2 M 7.0% $280.8 M 6.8% $288.8 M 6.6% $296.1 M 6.3% $323.0 M 6.4%

Corrections $194.1 M 5.0% $202.5 M 4.9% $207.6 M 4.7% $213.9 M 4.6% $237.1 M 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% $77.1 M 1.5%

Higher Education $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%

Public School Support $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%

Other Education $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%

Total Appropriations Act $3,886.6 B $4,105.1 B $4,378.5 B $4,678.5 B $5,070.8 B 100.0%

NM Personal Income (P I) $45.7 B $48.6$ $52.4B $54.7 B $59.2 B

Operating Budget as % of P I 0.085 0.084 0.084 0.084 0.086

share of total budget

share of total budget

FY 2005 operating budget

share of total budget

FY 2006 operating budget

share of total budget

FY 2007 operating budget

FY 2003 operating budget

share of total budget

State Budget Category …...State Agency ………….. (division budget)

FY 2004 operating budget

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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%

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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

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To increase the total operating budget, we can:

• Raise taxes

• Reduce tax expenditures

• Or, do both

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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.

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

» Gen. Fund Local Total• 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

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‼Tax expenditures are important :

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

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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.

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A tax system should generate adequate, stable revenue to

consistently fund state services

Adequacy:

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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….

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Taxes Must Be Increased

New "Sin" Taxes???

NM's flat income tax could be raised

Investment income-as reserves go down, so

will investment $$$ Extraction tax

revenue depends on oil and gas

Increase Sales and Excise Taxes

???

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Other Government

Fewer public health clinics?

Medicaid cuts? Eldely? Dis-

abled?

Higher Edu-cation $$$ reduced

Public Safetly

Less $$$ for Public Schools

OR … Services Must Be Cut

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OR…

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

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Finally, a good tax system should be

FAIR

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A tax system should distribute the tax burden

broadly, with those in higher income brackets paying

more

Fairness

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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% $611,000-1%

0%

1%

2%

3%

4%

5%

6%

7%

-0.3%

0.7%

1.5%

2.3%

3.5%

4.4%

5.9%

-0.3%

0.7%

1.4%2.0%

2.9%3.2%

4.0%

Before cut After cut

No benefit

Greatest benefit

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

top 20%

Tax

Rate

Income Level

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.

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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.

BUSH CUTS NM CUTS

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New Mexico and Federal Tax Cuts in 2007:

Who Benefits

Less Than $16,000

$16,000 - $29,000

$29,000 - $45,000

$45,000 - $72,000

$72,000 - $138,000

$138,000 - $295,000

$295,000 or more

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$70 $306 $597 $831 $1,737$3,151

$21,204

$0 $0 $38 $158 $638 $2,307

$13,227

Federal NM

Income Level

Fede

ral T

ax C

uts 2

007

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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.

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Some policies to consider…

A Tax Expenditure ReportWhat 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.

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• 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.

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

What You Can Do

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