Tax War

The tax cuts signed into law Friday by President Donald Trump today are likely to impact working, lower-income New Mexicans—not to mention the state budget—in insidious, tough-to-spot ways over time, economists tell SFR.

That's the opposite of what Trump, who has painted the tax bill as a Christmas gift, and other Republicans who helped him shove the bill into law say will happen.

The tax bill is a boon for the wealthy, including members of the US Congress, where the median income is more than $1 million. And it's extremely expensive, all but guaranteed to increase the national debt by about a trillion dollars even with any economic activity it may induce.

"One thing that's been stated repeatedly is the tax cuts pay for themselves," says Jim Peach, an economics professor at New Mexico State University. "They maintain the fiction, and it is a fiction, if you cut taxes the economy will grow faster and it will pay for itself, but we've had repeated examples of this going all the way back to the Kennedy tax cuts in the 1960s to the Truman tax cuts right after WWII, that do not pay for themselves."

In New Mexico, he points to Governor Susana Martinez' cut to the corporate income tax rate as a stateside example that hasn't paid for itself.

Some of the things about the tax bill that have received significant attention won't have much of an effect in New Mexico, at least not directly. For example, there are no Fortune 500 companies headquartered in the state, so the feds cutting the top corporate tax rate from 35 percent to 21 percent won't mean much here.

But New Mexico may directly lose out on more than $400 million if the rising federal deficit to pay for the cuts triggers a reduction in the amount of federal mineral leasing payments it pays to the state for oil and gas drilling and coal mining on New Mexico land. This would be due to a 2010 federal law mandating across-the-board cuts in spending if the federal budget increases projected deficits.

The state could also lose millions in funding for Medicare, says Peach, and people who have health insurance through the state's exchanges will see their monthly premiums rise because the tax bill eliminates the "individual mandate," a provision in the Affordable Healthcare Act ("Obamacare") that penalized people for not signing up for health insurance.

"It could affect things like Medicaid," Peach says. "There could also be cut backs in other areas like education spending. We just don't know."

On an individual level, people in New Mexico may see a bump in the amount of money they can keep from the federal government due to the doubling of the standard deduction, says Richard Anklam, an analyst at the New Mexico Tax Research Institute.

However, Anklam says that because the state uses the tax return of people and corporations as the starting point for New Mexico's tax, a tax cut at the federal level may trigger higher state taxes.

For example, consider a single mother with one child, who can claim a standard deduction right now of $9,000. That deduction will jump to $18,000 under the tax bill, but because the bill nixes the "personal exemption"—a tax break that helped families with children—she'll lose some of that gain.

She may receive a larger child tax credit under the bill, but the Center on Budget Priorities and Policies, a think tank, found that an earlier version of the tax bill partially or completely excluded about 40 percent of working class families in New Mexico from that relief. The child tax credit provision in the bill that became law will help wealthier families more than those in the working class.

Under the bill, people will no longer be able to deduct certain expenses from their taxable income. These include deductions for moving costs, certain personal losses, mortgage interest, state and local taxes and alimony. But it may not even be worth itemizing expenses because those who do would lose out on the increased standard deduction.

State income taxes are about 20 percent of a person's federal tax bill, Anklam says. But even with the slight increase in state taxes, most New Mexican households may get a bit more in returns from the tax bill in the short run.

"There was a chance that on balance this was a net state tax increase," Anklam said. "It's an interesting conundrum because there are people [in New Mexico] who want to see income taxes go up, but they don't want to see them go up on the backs of Sally and her two kids."

Yet that's basically what the tax bill does, in reverse-Robin Hood fashion. Except it won't happen in one fell swoop. It will happen with incremental but compounding changes that are more difficult to see, chipping away at the safety net and public programs that the rich don't need but that millions of others depend on.

"That was deliberately designed," says Peach. "The President of the United States is talking about this as if it's a Christmas present. Sometimes the shine wears off of the Christmas present pretty quick."