Gov. Bill Richardson vetoed an obscure little tax budget bill in 2007 — and it’s a veto that may come back to haunt Santa Fe in a big way.

As next month’s legislative session approaches, so do some very hard decisions, as legislators face a looming budget deficit that by all accounts is going to be massive. But now Richardson is leaving just as the financial picture is heading south, and his veto prevents lawmakers from having a clearer picture of their options for finding revenue to keep programs funded.

The bill that Richardson vetoed called for the state’s Taxation and Revenue Department to issue an annual list of all the tax revenue that is not collected due to the many tax credits, deductions and exemptions that are on New Mexico’s books.

The total of these so-called “tax expenditures” exceeds $5 billion, according to a report by New Mexico Voices for Children. That’s almost equal to the state’s entire general fund.

Tax credits, deductions and exemptions are familiar to all of us. Just about everyone uses them come tax time to reduce the amount of taxes we owe. The legislation Richardson wouldn’t sign would have itemized all of these, estimating how much tax revenue forgone it represents that year and noting who benefits from it.

Norton Francis, chief economist for the Legislative Finance Committee, said the intent of the bill was to add transparency to the tax system.

“It would be valuable to remind legislators about individual [tax expenditure] items — in terms of how much they cost, what the intent of each is and who benefits. And had the bill been passed two years ago, we’d have it now that we are in this downturn,” Francis told the Independent.

“It would allow us to make more informed decisions about various segments of tax policy that might need revisiting.”

Many other states have such transparent tax budgets. The one maintained on this Minnesota state Web site shows that it’s a pretty straightforward presentation. Each exemption or deduction is listed with the date it was implemented, a description and the estimated tax revenue it represents.

So why shouldn’t New Mexico make such a budget?

Jim Nunns, director of New Mexico’s Taxation and Revenue Department, told the Independent that producing a budget showing all the tax-relief items is not as cut-and-dried as it may sound.

First, he said, these tax breaks reflect the deliberate use of the tax base to achieve certain policy goals — like making charitable donations tax-deductible to encourage giving.

“It’s not that you aren’t collecting money, it’s like you’re collecting it and spending it at once,” he said. “The government is allowing people or businesses to exempt or deduct certain revenue from taxation in order to achieve a certain public-policy outcome.”

But an annual budget that includes everything would be misleading, he said, because not all of these tax breaks are targeted at achieving a special policy outcome — rather, some are there to correct the flawed structure of the tax code.

For instance, deductions for business purchases of items used in the production process are on the books because not including them would lead to double taxation, Nunns said.

Nunns hired a consultant in 2007 to examine each area of the tax base and determine what he calls the “correct” tax base so that the “actual” tax expenditures can be identified. Presumably, this means some of the exemptions and deductions would be listed on a tax-expenditure budget, should one be made, but others wouldn’t.

Tom Clifford, research director at the New Mexico Tax Research Institute, agrees with Nunns that such budgets can be misleading. Without the large set of breaks for business transactions, he said, double taxation would be common: once when a product is purchased for use in production, and again on the income from the sale of the final product.

These complications are a function of how New Mexico’s tax code was designed, he said. Some states, he explained, have “additive” systems, which start small and then add items to the code.

“But New Mexico taxes everything,” Clifford said, “then subtracts its way to a proper tax code. This makes it necessary to have a large set of exemptions and deductions that shouldn’t be thought of as tax expenditures meant to achieve public-policy goals.”

But Gerry Bradley, an economist and research director for Voices for Children, thinks New Mexico’s tax code works well for the state. And, he said Nunns and his consultant, Thomas Pogue, are essentially redesigning New Mexico’s tax code in their research into the “correct” tax base.

“The reports they are producing are filled with the word ’should’ — this means that they are designing a new tax code, rather than producing a straightforward tax-expenditure budget,” he said.

“Our tax code was created in the early 1970s by Franklin Jones and Gerry Boyle, who were hardly radicals. It’s a strong tax code and a good foundation for our general fund. And it is our tax code. This makes me the conservative one on this topic.”

Bradley said there’s no reason the Legislature and the public shouldn’t have the benefit of a tax-expenditure budget that shows all the deviations from the tax base.

Norton Francis seems to agree, although he sees the value in the studies being undertaken by the Taxation and Revenue Department.

“They’re doing fairly academic research about how a tax code should ideally be structured, which makes sense. But it could take a long time at this rate,” he said.

“I think a simple enumeration of the current expenditures would be a good first step. Then people can decide for themselves what is important or not.”


Contact the reporter by sending an email to mchildress@newmexicoindependent.com.