Taken Off the Top

A tax exemption for Social Security income might come to New Mexico seniors—ahead of efforts for wider tax reform next year

Some New Mexicans receiving Social Security income may be exempt from a state tax that has existed since 1990 if a House package passes through the Senate this week. (Jair Ferreira Belafacce/Shutterstock)

Since before this year’s legislative session began, Democrats and Republicans have hoped to spare New Mexico’s retirees income from the tax man.

Most states exempt Social Security income; New Mexico is one of just a dozen that take a chunk from older residents’ monthly check.

“New Mexicans deserve it,” Gov. Michelle Lujan Grisham said in her January State of the State address, sending a clear signal that she wanted seniors and others to catch a break as New Mexico finds itself awash in revenue.

But a proposed Social Security exemption, and New Mexico’s larger tax landscape, are complicated—and divisive.

With two days left in the 30-day session—as election season looms—lawmakers and Lujan Grisham have proposed, cut, pasted and proposed again, several tax cuts, including the partial exemption for Social Security income.

House Bill 163, adopted by the House on Monday, would reduce the gross receipts tax rate, reinstate a temporary child tax credit and offer an extension to the solar market development income tax credit—plus exempt most Social Security income. The House tax package would keep the state from collecting around $360 million in the next fiscal year. That’s within the limit of $400 million that is available for changes to the tax code outlined in the current $8.5 billion state budget plan.

The House package, cobbled together with elements from several bills, reflects the rapidly evolving nature of tax proposals which often come together in the last minutes of the session. After its introduction at the beginning of the day, HB 163 passed a House committee and the House floor by Monday evening. It goes to the Senate Finance committee next.

The slate of reforms had previously divided lawmakers. Some, including Sen. Michael Padilla, D-Albuquerque, who is sponsoring Senate Bill 5, a similar tax package to HB 163, says exempting Social Security income would help to build a strong middle class.

Other lawmakers and advocates derided the effort as bad tax policy.

An original proposal to eliminate all Social Security income tax struggled to gain momentum in both chambers earlier in the session, but since sponsors added a cap on who could claim the benefit and paired it with other attractive tax credits, it’s gained promise to reach the governor’s desk before the session ends Thursday.

As some legislators have focused on passing this year’s package, others have hinted at making major tax reforms in next year’s 60-day session.

Senate Majority Leader Peter Wirth, D-Santa Fe, tells SFR that the state’s tax code needs reform. Over the years, exemptions and deductions have caused a “compaction of the gross receipts tax,” he says, adding that a larger overhaul is needed next year “to figure out which [tax rates] are working which are not.”

“We need to put some progressivity back into the income tax,” says Wirth, also a co-sponsor of HB163.

New Mexico began taxing Social Security benefits in 1990; debate has persisted since.

HB 163 would offer a break to single people who make less than $100,000 and married couples who file jointly and earn less than $150,000. Those above that limit would still pay taxes on their Social Security income.

Tax cuts have received priority signals from Lujan Grisham this year. Other proponents have pointed out their timeliness.

“This is the year to actually do it because we have the additional $3 billion in revenue so we can right-size the budget,” Padilla tells SFR. Padilla, who has sponsored similar legislation over the past six years, notes that the partial exemption for Social Security income tax—if passed through the House or Senate package—would continue for years to come.

Lawmakers often refer to New Mexico’s “rollercoaster” of revenue, given the nature of the state’s income. When the oil and gas industry booms, New Mexico has plenty of expendable income. This past year, the state received an additional $3 billion in revenue from taxes on fossil fuels and federal pandemic relief dollars. But when times are tough, “I’ve seen us hit the bottom,” says Wirth.

Looking toward the impact of this year’s tax exemption proposal on the state’s budget, Padilla says he isn’t worried about the state’s financial security, even when the federal dollars and income from the fossil fuel industry are less abundant. He says the state is projecting revenues similar to this year, “in this ballpark and neighborhood for the next three to five years.”

But others warn of taking away a source of income for the state.

“In New Mexico you can’t take things back. Once you give it away, it’s gone,” says James O’Neill, a former tax policy director at the state’s Taxation and Revenue Department. “So if you take something out of the income tax base, like Social Security, or military retirement, you’re never going to get it back.”

Among the initial selling points of HB 163 and SB 5: the need to provide more money to seniors raising grandchildren and increasing the spending power of state residents.

In an email, the governor’s spokeswoman, Nora Meyers Sackett, writes to SFR: “This tax hurts seniors who miss that lowest federal cut-off, many of whom care for grandchildren (49% of children being fostered in New Mexico live with their grandparents) or other family members.”

The lowest federal cut-off is $25,000 a year for individuals and $32,000 for couples, though there are other protections for elderly New Mexicans above the federal limit.

Last year the Legislature expanded who is eligible for the Low-Income Comprehensive Tax Rebate (LICTR) to those who earn up to $36,000, enabling those families—including seniors—to claim up to a $730 rebate to supplement their income.

Rep. Jason Harper, R-Rio Rancho, pointed out in a committee meeting earlier in the session, “Only half of the total amount of money that [goes] to pay for Social Security is taxed.” While employees pay taxes on the portion they pay into Social Security, the money contributed by an employer is not taxed. The federal government and New Mexico tax this portion, Harper explained.

Harper explained who would benefit from this proposed change to the tax code: “If we decide we want to move forward with this legislation, we need to understand that those who will be benefiting are those who are in the middle class…or in the upper class.”

Padilla says his proposal would get New Mexico in line with the majority of other states on Social Security tax policy.

“We need to get rid of that so that we can make New Mexico a much more attractive state for retirement,” Padilla tells SFR.

But the proposal’s opponents say the state doesn’t need to attract seniors.

Amber Wallin, executive director of New Mexico Voices for Children, tells SFR: “Seniors are by far the fastest growing [population group] in our state.”

“We also know that relatively out of any age group seniors are also least likely to live in poverty,” she says, comparing the elderly population to the quarter of children who live in poverty in New Mexico.

Editor’s note: This story originally included the wrong date for the end of the 30-day legislative session. It ends Thursday at noon.

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