A Taxing Dilemma

New Mexico's income stream is inextricably tied to oil and gas extraction, which means it's also wed to the prices for each resource. This is a good year. Lawmakers expect to have about $1 billion more than they budgeted for coming into state accounts through June. Come the next fiscal year, that number is currently predicted to be even higher.

But when those prices fall, as they had when lawmakers gathered in December for the last of their pre-session meetings, policymakers start to feel a little panicky.

"A downfall is going to happen again until we diversify," says Sen. Peter Wirth.

Many of his colleagues were eagerly watching the price per barrel of oil during that stretch, when it dropped from about $60 in early November to $43 just before Christmas. (Handy SFR tip: The general rule of thumb for New Mexico prices is to lop off $10-$12 from the West Texas Intermediate price for transportation costs.)

When the price drops too low, it costs more to get oil out of the ground than it's worth. That's a massive hit to revenue, because most of those oil companies pay tax on their services.

Wirth tells SFR he's been told that taxes on the oil and gas industry and payments to the state from the permanent funds, which get money from extractive industries and pay the earnings on those investments to the state, account for around 45 percent of the state's yearly revenue. The permanent fund money doesn't fluctuate as wildly as the tax money does, but it's a good indicator of the sector's importance to New Mexico.

Seeking stability and more predictable revenue, one of the biggest bipartisan efforts by lawmakers over the past few years has been drilling away at the task of revamping New Mexico's tax code. Rio Rancho Republican Jason Harper and Wirth, Santa Fe's Dem, have been among those looking at corporate and personal income tax, as well as the gross receipts tax system.

An idea championed by conservatives like the late Rep. Larry Larrañaga has been to broaden the gross receipts tax, thereby lowering the rate. A GRT is a little like a sales tax, but is applied to more things, like services. To boost businesses and industries, the state has to carve out exemptions. There are tons of them. A recent bill authored by Harper sought to close about 100 carve-outs. That, supporters argue, accomplishes the dual purpose of simplifying the tax code while at the same time giving the state enough wiggle room to consider lowering the gross receipts tax.

But New Mexico relies heavily on that tax to pay for its $6.2 billion annual budget.

"One of the things that really struck me," Wirth says, "is that to lower GRT by a quarter percent takes $200 million out of our revenues."

Since counties and cities, especially the latter, rely on GRT for their budgets, too, tax reform is tricky. But doing so is much easier in fat times than in lean ones, so late last month, the Legislature's interim Revenue Stabilization and Tax Policy Committee met to consider two rough versions of tax reform. They would both decrease the gross receipts tax a little, between 0.6 percent and 0.75 percent at a minimum. It might sound paltry, but the cost to the state would be more than half a billion dollars.

One scenario reinstates the food tax to pay for the cuts, one does not.

"When you look at those [GRT carve-outs] that we can use to buy down the rate, there's really roughly 10 or 15 that have real dollars," Harper told his colleagues at the meeting. But both he and other lawmakers favor going the extra mile to eliminate dozens of other carve-outs to simplify the tax code.

"I was hoping for tax reform. I don't know that that is the case. This doesn't appear to really be tax reform; it appears to be a tax shifting," intoned Farmington Republican Rep. Rod Montoya.

For others, like Wirth, changing who pays what tax is worth it, even if revenue is more or less a wash.

"At the end of the day, it makes the tax code a lot fairer," he says.

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