{"id":312268,"date":"2017-03-24T16:04:08","date_gmt":"2017-03-24T22:04:08","guid":{"rendered":"http:\/\/nmpolitics.net\/index\/?p=312268"},"modified":"2017-03-24T16:04:08","modified_gmt":"2017-03-24T22:04:08","slug":"an-analysis-of-the-martinez-administrations-tax-cuts","status":"publish","type":"post","link":"https:\/\/nmpolitics.net\/index\/2017\/03\/an-analysis-of-the-martinez-administrations-tax-cuts\/","title":{"rendered":"An analysis of the Martinez Administration’s tax cuts"},"content":{"rendered":"

COMMENTARY:<\/strong> As the 2017 regular legislative session ends, New Mexico finds itself in familiar territory \u2014 with no money in a slow-moving economy. The same tired rhetoric of no tax increases \u2014 a pledge made by Governor Susana Martinez since she has taken office \u2014 has led to deep cuts in essential services like education, public safety, and health care.<\/p>\n

\"Raphael

Courtesy photo<\/p>

Raphael Pacheco<\/p><\/div>\n

Because we often hear the administration touting the 37 tax cuts made since Governor Richardson left office in 2011, obviously the executive believes we can cut our way to prosperity. But in reality, these cuts helped put our state in the red.<\/p>\n

All tax cuts serve a fundamental purpose \u2014 to change behavior. For example, if you were able to deduct all purchases you made on pizza from your personal income taxes every year, you would probably eat a lot more pizza. That logic is valid for a tax cut on jet fuel enacted by the Martinez administration in 2011. By reducing taxes on jet fuel, it is hoped that more jet fuel is purchased in New Mexico, thus resulting in an economic boost to the airline industries. This isn\u2019t the problem.<\/p>\n

The problem occurs when the underlying assumption for a behavior change is incorrect. In 2014, the Martinez administration passed a tax deduction for the sale of infusion therapy services. Infusion therapy is the practice of administering medication through needles or catheters. What behavior was this tax cut aimed at changing? Not the behavior of the service providers. They weren\u2019t going to leave the state because the cost of doing business was too high. These services were going to stay in New Mexico because the demand for them is high. It won\u2019t change the behavior of consumers because these are likely life-saving services. And, due to an aging population, the Affordable Care Act, and expanded access to Medicaid, more people need and can afford these services.<\/p>\n

But even if the underlying assumption is correct, at least on paper, a different problem may occur. Going back to the jet fuel example: In the five years since the tax cut was implemented, it is unclear if the deduction is having any influence on purchases of jet fuel in New Mexico, according to the 2016 tax expenditure report. So if the tax cuts are not resulting in the intended outcome motivated by the assumption, or the underlying assumption was just flat incorrect, then they are not working. Put simply, if tax cuts are ineffective, we should not still have them in the tax code.<\/p>\n

This brings me to another problem. If these tax cuts have minimal impacts on job creation and industry growth while simultaneously leaving New Mexico in a bigger fiscal hole than we were in before, why do we keep them? When will we change strategies?<\/p>\n

Death by 37 (tax) cuts<\/strong><\/p>\n

A blog<\/a> by Capitol Report New Mexico<\/em> outlined the few dozen tax cuts the governor has claimed to have made during her tenure. I wanted to dig deeper into these tax cuts to see how much they cost and if they benefitted the state. After several hours of poring through fiscal impact reports and legislation, several hundred milligrams of caffeine, and about five Excel spreadsheets later, I now present to you the 37 (29 is probably more accurate) tax cuts provided by the Martinez administration.<\/p>\n

Before diving in, I ask the reader to realize that, for me, researching tax policy is best described by the blue line in Figure I. While, for you, interest may by graphed more like the orange line.\"\"<\/p>\n

Frankly, the phrase \u201cgetting into the weeds\u201d doesn\u2019t do this research justice. So to spare some of your time and sanity, I won\u2019t go into detail for every<\/em> tax cut the administration claims as their own. If you\u2019re interested in learning more about any of these cuts, however, please feel free to email me<\/a>.<\/p>\n

Let\u2019s dig in!<\/p>\n

2011 legislative session<\/h3>\n

HB 273, Small Business Tax Credit Eligibility Period
\n<\/strong>Cost: $761,000<\/p>\n

Do you own a small business? If not, you didn\u2019t benefit from this cut that ended in the summer of 2015. This bill extended the eligibility period for the Research and Development Small Business Tax Credit. Not a large number of taxpayers, however, were eligible for this credit. It\u2019s simply targeted legislation that helps a select few, a pattern that will continue as we work our way through the years.<\/p>\n

HB 440, Advanced Energy Tax Deduction for Some Leases
\n<\/strong>Cost: $44.2 million<\/p>\n

Although the current administration claims this deduction as their own, HB 440 was merely an extension of a tax cut enacted by the Richardson administration \u2014 the Advanced Energy Gross Receipts Tax Deduction for the sale of \u201cequipment for an advanced electrical generation facility.\u201d If you\u2019re asking yourself what that means for you and me, the answer is \u201cnot much.\u201d The Martinez extension added \u201cleases\u201d in addition to sales and purchases of eligible electrical equipment. For most New Mexicans this is much ado about nothing.\u00a0<\/strong><\/p>\n

HB 523 and SB 179, Locomotive Fuel Gross Receipts Deduction
\n<\/strong>Cost: $19.5 million<\/p>\n

Remember this one? This was dubbed the \u201cUnion Pacific\u201d bill by many because it made locomotive fuel tax exempt, contingent upon Union Pacific opening a port in Do\u00f1a Ana County, specifically Santa Teresa. Union Pacific has been cited as saying that the bill allowed for the construction of the facility, so we\u2019ll take their word for it and give the administration the benefit of the special-interest doubt on this one.<\/p>\n

SB 84, Jet Fuel Gross Receipts
\n<\/strong>Cost: $4.4 million<\/p>\n

This is the jet fuel tax reduction mentioned before for fuel prepared and sold for use in turboprop or jet-type engines. And we still don\u2019t know if it helped the airline industry in New Mexico.<\/p>\n

SB 282, Tax Liability for Certain Physicians
\n<\/strong>Cost: $275,000<\/p>\n

Are you a clinical oncologist in rural New Mexico who treats patients in cancer clinical trials? You may start to get the pattern by now, but you almost certainly didn\u2019t get the tax cut.<\/p>\n

Will the remaining years be any better? Keep in mind we\u2019re only a fifth of the way through!<\/p>\n

2012 regular legislative session<\/h3>\n

HB 10, Veteran Employment Tax Credit
\n<\/strong>Cost: $12 million<\/p>\n

This bill allowed business owners in New Mexico to receive a $1,000 tax credit for each veteran they hire. This credit brings up an interesting problem. By creating a tax preference for hiring veterans, it places non-veteran job applicants at a disadvantage. Additionally, there is no consensus on whether veterans have significantly different unemployment rates than other groups of men, for example, in those age ranges. To illustrate, the unemployment rate for Gulf War-era veterans is 4.8 percent, which is only slightly higher<\/a> than the nationwide average for men aged 35 to 44.\u00a0For additional comparison, the state\u2019s unemployment rate is 6.7 percent.<\/p>\n

HB 116, Electric Conversion Facility Gross Receipts
\n<\/strong>Cost: unknown<\/p>\n

This law provided a tax exemption for the electricity that is used during the production and transmission of electricity. Simply put, it\u2019s a tax break for getting power from point A (like a power grid) to point B (like homes or businesses). The purpose of the exemption was to encourage the building of power lines and to provide an incentive for an electricity exchange to be located in New Mexico. (Although no fiscal impact report was done for this bill, it\u2019s estimated\u00a0that for an energy company with sales of $500 million, the state would lose $29 million per year.) Despite the cost, this puts us in line with other state\u2019s tax structures.<\/p>\n

HB 184\/256, Construction Service for Gross Receipts & Manufacturing Property Gross Receipts
\n<\/strong>Cost: almost $200 million<\/p>\n

These tax deductions are the most glaring of all. Costing the state almost $200 million in lost revenue since their creation, the two deductions are directly counter to the Legislative Finance Committee tax policy principle of adequacy, which means it will cost more to implement this tax change than it\u2019s worth.<\/p>\n

The first of these, the Manufacturing Gross Receipts Deduction, allows the deduction of \u201cproperty consumed in the manufacturing process\u201d \u2014 or the cost of the stuff used in the making of other stuff. This would include the cost of utilities, for example. The intention of this legislation was to reduce pyramiding. This means taxes charged on business-to-business sales that become embedded as part of the cost and thus making the final product more expensive.<\/p>\n

The second, the Construction Gross Receipts Deduction, makes it easier for a construction worker to rent equipment without having to pay tax on it.<\/p>\n

It was hoped that these would create more jobs in the manufacturing and construction industries. Although job creation is not included in the impact analysis, when the deductions went into effect in 2013, there were 28,800 workers in the manufacturing industry in New Mexico; that number is now at 26,500 \u2014 a decrease of 8 percent. Construction, however, was at 40,100 workers at the beginning of 2013 and that number is now 45,200 \u2014 an increase of 12.7 percent. Together, we have a net gain of 2,800 jobs in these two industries over four years. So, essentially, the state spent $70,000 for each of these jobs, which is likely more than these jobs pay. This assumes, however, that all jobs can be attributed to the exemption \u2014 clearly, employment in this industry can be attributed to other factors not related to this deduction as well.<\/p>\n

SB 32, Temporary Unemployment Fund Contributions
\n<\/strong>Cost: $160 million<\/p>\n

This bill changed the amount of money employers had to pay into the unemployment insurance trust fund, which compromises the fund\u2019s solvency. Will the fund be solvent for the next economic down-turn? I\u2019m skeptical. It\u2019s also not a tax cut so much as an insurance rate cut.<\/p>\n

2013 regular session<\/h3>\n

HB 106, Increase Value of City Property for Lease
\n<\/strong>Cost: negligible<\/p>\n

This bill raises the threshold from $25,000 to $250,000 for the sale of municipally owned facilities or real property without a referendum (a vote by the electorate). It might save some time, but it\u2019s not a tax cut.<\/p>\n

HB 641, Film Production Tax Credit Changes
\n<\/strong>Cost: $68.8 million<\/p>\n

Truly a Barnum & Bailey bill, this bill made several changes to the tax code and not to just the film industry. HB 641 did seven things, but here are the worst:<\/p>\n

    \n
  1. Lowered the corporate income tax rate over five years.<\/li>\n
  2. Allowed manufacturing corporations to not pay any income tax.<\/li>\n
  3. Allowed municipalities and counties to increase their local tax rates.<\/li>\n<\/ol>\n

    Let\u2019s see here: a cut for corporations, another cut for corporations, and a tax hike for the rest of us. You and I foot the bill at almost $69 million. Sounds fair.<\/p>\n

    SB 81, Liquor Tax Microbrew Volume Limit
    \n<\/strong>Cost: $2.3 million<\/p>\n

    Tax bills about beer? Finally! Truly a bill after my own heart, this amended the language and definition of what constitutes a microbrewer. It now means a brewer who produces fewer than 15,000 barrels of beer annually, whereas the threshold was less than 5,000 barrels before. This allowed more brewers to qualify for the credit, as well as lowered the tax rate of microbrewed beer from 41 cents to a mere 8 cents (for the first 10,000 gallons). In New Mexico we have enjoyed the prosperity of craft microbreweries for a while now. As the market has experienced a massive increase in patronage as millennials continue to age and imbibe, tax cuts for burgeoning industries are often sound tax policy. But an 80 percent tax decrease on brews produced \u2014 do microbrewers really need that much help?<\/p>\n

    SB 116, Liquor Tax Small Winegrowers Volume Limit
    \n<\/strong>Cost: $1.8 million<\/p>\n

    If beer isn\u2019t your thing, perhaps wine is. This bill increased the production cap for small winegrowers as well as cut the tax rate for each liter of wine produced within in that new range from 45 cents to 30 cents. Now again, there is nothing wrong with cutting taxes to spur industry growth. Please keep in mind, however, this is a tax cut for winegrowers, not the people who drink wine. And much like the microbrewery bill before, this cut decreased state revenues, which in the end means less access to vital services for you and me.<\/p>\n

    SB 160, New Biodiesel Definitions
    \n<\/strong>Cost: $2.3 million<\/p>\n

    There are exactly two producers in New Mexico that make the biofuel that falls under this definition: Rio Valley Biofuels and Renewable Energy Group, located in Anthony and Clovis, respectively. SB 160 is a tax cut tailored for these producers. At the time of the analysis a third producer existed but had not yet begun production.<\/p>\n

    2014 regular session<\/h3>\n

    HB 14, Aircraft Parts & Maintenance Gross Receipts
    \n<\/strong>Cost: $1.6 million<\/p>\n

    This bill provides a tax deduction for selling aircraft parts or maintenance services for aircraft or aircraft parts. A cut for aviation but not for me and you.<\/p>\n

    SB 88, Infusion Therapy & Medical Supply Gross Receipts
    \n<\/strong>Cost: $8.9 million<\/p>\n

    We\u2019ve already looked at this tax deduction for the sale of infusion therapy so there\u2019s not much more to say except that when the legislation was enacted there were 40 infusion therapy equipment suppliers who filed gross receipts tax returns, which suggests that this is an industry likely to thrive without special treatment.<\/p>\n

    HB 32, Dialysis Facility Service Gross Receipts
    \n<\/strong>Cost: $3.7 million<\/p>\n

    A similar type of legislation was also passed in 2014 that provided a tax deduction for health services provided by a dialysis facility to Medicare beneficiaries. About 3,000 dialysis patients reside in New Mexico, so this is a deduction that benefits only a few. The real problem is that both this deduction and the infusion therapy deduction exist in markets that are driven by demand, meaning they will likely continue to succeed as long as people need the services. These kinds of tax deductions should only be used to encourage the supply side of the equation (such as beer and wine consumption).<\/p>\n

    2015 regular session<\/h3>\n

    SB 279, Sustainable Building Tax Credits
    \n<\/strong>Cost: $10 million<\/p>\n

    This bill was enacted in 2013 and amended in 2015. The credit was designed to be used for the construction and renovation of either commercial or residential buildings that met the \u201cLEED green build rating system.\u201d Investing in green infrastructure is something everyone can get behind, and hopefully this credit will actually serve its purpose for constructing higher quality buildings and encouraging energy efficiency.<\/p>\n

    SB 506, Disabled Veteran Property Tax Exemptions
    \n<\/strong>Cost: negligible<\/p>\n

    This legislation enables disabled veterans to maintain their exemption on property tax even if they change their residence. This does not qualify as a tax cut and the fiscal impact is negligible.<\/p>\n

    2015 special session<\/h3>\n

    The 2015 Special Legislative Session resulted in a tax package that contained a lot of moving parts but little in the way of tax cuts for New Mexico\u2019s hard-working families.<\/p>\n

    HB 2, Angel Investment Tax Credit
    \n<\/strong>Cost: $1.3 million<\/p>\n

    A tax cut for investors. The term \u201cangel\u201d refers to an individual who provides capital for start-up business costs in exchange for some equity in the business or convertible debt.\u00a0<\/strong><\/p>\n

    HB 2, Singles Sales for CIT and Border Zone Trade for GRT
    \n<\/strong>Combined cost: about $200,000<\/p>\n

    With a combined loss of a little over $200,000 to state revenues \u2014 very little money in the scheme of things \u2014 it is difficult qualifying these as additional tax cuts.<\/p>\n

    HB 2, U.S. Department of Defense Energy GRT
    \n<\/strong>Cost: $9.3 million<\/p>\n

    The Air Force Research Laboratory (AFRL) at Kirtland Air Force Base is the primary recipient of this tax break. In February 2015, UNM\u2019s Bureau of Business and Economic Research concluded that the economic impact of the AFRL was $536 million, so a $9.3 million impact seems relatively small and justified if it keeps them in New Mexico.<\/p>\n

    HB 2, Tech Jobs and R&D Tax Credit
    \n<\/strong>Cost: $5.2 million<\/p>\n

    The stated purpose of this legislation is to provide a favorable tax climate for technology-based businesses engaging in research, development, and experimentation to promote increased employment and higher wages in these fields. Recent data show that 54,577 New Mexicans were employed in the professional, scientific, and technical service industry in New Mexico in 2015, with an average wage of $1,445 a week.\u00a0<\/strong><\/p>\n

    Where does that leave us in 2017?<\/h3>\n

    The tax cuts heralded by Susana Martinez have cost the state more than $500 million during her stay as governor of New Mexico. Frankly, the 37 cuts figure the Martinez administration often references is inflated and misleading. But regardless if the number is 1, 29, 37, or 500 million, when will the special interest tax breaks end?\"\"<\/p>\n

    Did the tax cuts have their hoped-for job-creating impact? That\u2019s hard to say, but I leave you with the next graphic\u00a0so you may make your own conclusions (and, no, the state\u2019s unemployment rate hasn\u2019t gotten better since 2016. In fact, in January of 2017 it was 6.7 percent\u2014the highest in the nation).\"\"<\/p>\n

    Dear reader, whether good or bad, for you or not, tax cuts that are not offset with new revenue are irresponsible and regrettable at best, and off-target and unsustainable at worst. We must restore lost revenue to the state if we are to survive another fiscal year. The first rule about getting out of a hole if you find yourself in one is to stop digging.<\/p>\n

    A hole filled with half a billion one-dollar bills is about 63 cubic meters by volume. It\u2019s time to stop digging.<\/p>\n

    Raphael Pacheco, MBA, is a policy and research analyst and state priorities partnership fellow at New Mexico Voices for Children<\/a>.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

    If these tax cuts have minimal impacts on job creation and industry growth while simultaneously leaving New Mexico in a bigger fiscal hole than we were in before, why do we keep them?<\/p>\n","protected":false},"author":1,"featured_media":276141,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1192,16],"tags":[196,107,271],"class_list":["post-312268","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-commentary","category-guest-columns","tag-budget","tag-roundhouse","tag-taxes"],"_links":{"self":[{"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/posts\/312268","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/comments?post=312268"}],"version-history":[{"count":0,"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/posts\/312268\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/media\/276141"}],"wp:attachment":[{"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/media?parent=312268"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/categories?post=312268"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/nmpolitics.net\/index\/wp-json\/wp\/v2\/tags?post=312268"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}