New Mexico’s Lawmakers Compromise to Pass Corporate Tax Cut Reduction Package

New Mexico lawmakers have passed tax legislation that overhauls portions of that state’s corporate income tax code, in addition to making changes to the state’s film production credit program and the way the state funds certain local governments. The bill originally only addressed the film production tax credit program, but was amended to become a more comprehensive tax package. The Governor is expected to sign the legislation into law shortly.

The most promising portion of the measure is the reduced corporate income tax rate. The bill lowers the top rate from 7.6 to 5.9 percent over a five year period. New Mexico has the highest rate among all of its neighbors, so bringing the rate down will most definitely make the state more business-friendly.

In addition to the corporate income tax reduction measure, other major provisions in the bill include:

• Allowing manufacturing companies to utilize single sales factor apportionment (will be phased in over five years);
• Implementing combined reporting requirements for certain retailers within the state (it was optional for “big-box retailers” previously);
• Changing the state’s “high-wage jobs” credit to include more strict eligibility requirements (as well as extending the timeframe to 2020);
• Capping film production tax credit at $50 million per year, allowing for a portion of credits to carry over across years, and allowing for the credit of an additional five percent of certain film projects; and
• Phasing out certain local government funding to compensate for lost food and medical services sales tax over 15 years.

There’s a lot going on this tax package—some good, some not so good, and some controversial. The state was smart to reduce the corporate income tax rate. Corporate income taxes are the most volatile source of tax revenue, and the fact that New Mexico only derived a mere 1.9 percent of total tax revenues from corporate income taxes in 2010 means that moving away from the tax isn’t an irresponsible move.

The local government funding provision is sure to draw criticism from local governments who are concerned about lost revenue. A portion of this particular provision allows affected local governments to raise the local portion of gross receipts taxes to cover losses. We’ve been vocal about the issues with gross receipts taxes. They’re complicated, non-neutral, and create inefficient economic distortions. Shifting local government funding back to local governments themselves has merits, but increased reliance on gross receipts taxation is a poor way to do so.

Governor Susana Martinez (R), who originally championed corporate income tax reductions, also pushed for the overhaul of inefficient and poorly-monitored tax credit programs such as those included in the final tax package. The first, the high-wage jobs credit, has been slammed by the Pew Center on the States. A report noted how the credit’s cost has ballooned over time due to “businesses…learning they could claim credits for jobs they had created years earlier without knowing about the tax credit” rather than as a result of economic growth and the employment that accompanies it.

Film production tax credits also generate warranted scrutiny. They create temporary jobs that don’t allow for upward mobility. They’re costly and don’t achieve long-term economic growth. Tax policies shouldn’t just encourage the temporary movement of business to a state, but should instead create an environment that is favorable to business without the use of high-cost, low-return gimmicks such as these. There was speculation as to what would come of this credit—the Governor opposed expansion of the program initially but then accepted it as a portion of a greater tax package that included corporate income tax reductions.

Reduction of the corporate income tax rate is a positive move. Increased oversight on costly incentive programs is, too. Getting rid of targeted carve-outs for certain industries and activities would have been even more promising because it could have lowered the rate even more by broadening the tax base. New Mexico’s plan is a mixed-bag, but is admittedly the outcome of legislative and executive compromise—something that is often hard to come by.