Eliminating Tax Credits Won’t Solve Budget Problem

With a $400 million budget deficit facing lawmakers when they return to Santa Fe, the 100+ tax credits and deductions that the state offers have justifiably come under greater scrutiny. While we applaud the increased concern over New Mexico’s fiscal condition, there are a few important points to keep in mind.

First and foremost, while the Tax and Revenue Department lists the film subsidy as a “tax credit,” this is a misnomer that can lead to poor policy decisions. The full spreadsheet of credits, exemptions, and deductions is available on our website atwww.riograndefoundation.org/downloads/rgf_nm_revenue_impact.pdf. The film “credit” provides a 25 percent rebate on each dollar the film industry spends in the state. In FY 2009, this amounted to a $76 million outlay while in FY 2010, the total expenditure was approximately $66 million. This wealth transfer is inherently inefficient and should be considered for elimination.

The rest of the tax credits and deductions and involve people or businesses not paying taxes on activities that would otherwise have been taxed. From both an economic and moral perspective, the film subsidy is far different than a credit or deduction. Transferring money from one taxpayer to another is far different than simply allowing a taxpayer to hold onto his or her own money.

The other thing to keep in mind is that eliminating tax credits and deductions is inherently a tax increase. Also, tax credits and exemptions are often used to alleviate inherent inefficiencies found in New Mexico’s tax system.

Approximately half of the exemptions and deductions (including some of the largest ones) apply to New Mexico’s mineral and other extraction industries. Any efforts to raise revenue by taxing those industries will make our state less attractive to those who do business in the state and employ thousands of New Mexicans and pay millions and even billions of dollars in taxes to the state annually.

Of course, that leaves dozens of other tax credits and exemptions. When it comes down to it, the impact of most of them is measured in the hundreds of thousands of dollars, not in millions. That means that their elimination would be of limited value when one considers that the state faces a $400 million deficit this year.

The biggest single deduction is the approximately $200 million gross receipts tax exemption for groceries against the gross receipts tax. I’m not sure that Gov. Susana Martinez wants to go down that path after the contentious debate we saw last session.

A second, much smaller exemption is the $67 million the state forgoes by taxing new vehicle title transfers at 3 percent instead of the 5 percent statewide rate. From a tax perspective, it may not make economic sense to tax vehicles at a lower rate than other consumer goods, but the Rio Grande Foundation will fight tooth and nail against raising this tax.

One tax that might be re-worked is the exemption granted under Richardson for payments to health care providers by third-party-payers (insurance companies). This deduction reduces state revenue by approximately $60 million annually.

With everything going on in the health care sector these days, I’m not sure if this is a wise way to raise $60 million, but from a taxation perspective it would make more sense to exempt patient payments (direct payments) from taxation than third party payments. After all, restoring the patient-doctor relationship must include a fiduciary relationship. Nevertheless, such a shift is not going to solve the budget problem.

These are just a few of the larger tax credits and deductions offered by the state. Other, far smaller incentives are focused on the aged, handicapped, job creation, wine and microbrewers. The fact is that eliminating any or all of these will have significant economic repercussions in the form of higher taxes on average New Mexicans.

The reality is that all of the “easy” cuts and “revenue enhancements (tax hikes)” have been done. Real spending cuts are both possible and necessary to secure New Mexico’s economic future. If legislators want to undertake more drastic reforms to the state’s tax structure, reforming or eliminating the gross receipts tax entirely (and moving to a straight sales tax) may be the way to go.

Paul Gessing is the president of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.