Spending Gap Close to $1B

While general fund revenue has been growing an average of about 3.4 percent a year for the past eight years, recurring spending has been growing an average of 5.7 percent, LFC analysis shows.

State spending levels for this year and last have been sustained with federal funds and the temporary availability of these federal funds has masked the true extent of the shortfall. Even after two rounds of budget cuts, recurring FY10 spending, including the use of the temporary federal funds, is some $900 million more than total recurring state revenue.

Since 2003, the state has adopted several tax cuts and incentives that reduce revenues by $600 million a year, the analysis shows. Income tax cuts represent $400 million of the revenue loss, while an elimination of the gross receipts tax on food and medical costs the state $130 million a year. Tax incentives for businesses and other activities and tax relief for low-income New Mexicans represent another $170 million in lost income.

The LFC report says a recent comparison of New Mexico’s taxes to those in surrounding states indicates the tax burden on New Mexico businesses is typical of the region, with those businesses that purchases a lot of services at a disadvantage and those with property at an advantage. A national study says New Mexico households pay a little more in taxes than those in neighboring states mostly because the state’s gross receipts tax, like a sales tax, is higher than most.

Although New Mexico’s tax system is relatively fair in the distribution of the tax burden between high- and low-income households, the income tax cuts favored high-income New Mexicans, with 80 percent of the rate benefit in the rate change going to households with incomes over $100,000 a year. The revamp of gross receipts taxes, which narrowed the range of services and sales subject to the tax but raised rates on the rest, distorted the business tax environment and made the tax more favorable to out-of-state retailers.

Although any significant increase in taxes will push New Mexico above average in the burden on business and individuals, an increase in the income tax on high-income households would improve the equity among income groups.

According to the National Conference of State Legislatures, nine states have raised income taxes on high-income households for the current fiscal year, five have reduced deductions and four have raised the tax on capital gains.

The conference reports five states have increased their gross receipts taxes, 13 have expanded the tax, and seven have tightened collections.