N.M should report “hidden” tax credits, experts say

Photo by Sara Grajeda

Like other states, New Mexico has hundreds of tax credits, exemptions and deductions. But New Mexico doesn’t compile all these so-called tax expenditures into a single report to show how much money it is forgoing as a result of policy decisions. In fact, New Mexico is one of only nine states in the U.S. that doesn’t even produce a bare-bones tax expenditure report, according to a recent survey.

Without an accurate accounting of those expenditures, it’s difficult for lawmakers to fully evaluate them when it comes time to look at the state’s budget. Such a report might have come in handy as New Mexico state lawmakers prepared for the upcoming special legislative session to address a nearly $700 million budgetary shortfall.

So far, most of the budget talk coming out of a negotiating group including Gov. Bill Richardson’s budget team and powerful lawmakers has revolved around cost-saving measures like cutting programs. But some advocates, including a coalition of organizations, point to the tax code as a way to recover revenue by reviewing — and ending — exemptions, deductions and credits that may have outlived their usefulness.

“Every dollar that any state spends should be accessible to the public so they can agree with or disagree with it,” said Jon Shure of the Washington-based Center on Budget and Policy Priorities, a left-leaning policy organization that conducted the recent survey of states.

Exemptions and tax credits are often described as tax expenditures because they keep a government from collecting money that would normally flow into a government’s coffers. And they’re often called “hidden” because they are embedded in the tax code, many of them without a “sunset” or end date.

Policymakers generally enact tax expenditures in order to help them further policy goals, some simple, some complex.

As the Center for Budget and Policy Priorities wrote in its recent survey:

“The goal may be as simple as conforming with the federal tax code, such as when a state adopts the same itemized deductions as the federal tax code. Or it may be complicated and difficult to evaluate, such as the use of tax breaks to encourage economic development. Some tax expenditures benefit many taxpayers; others benefit just a few. For example, most states allow income tax filers to claim a personal exemption against their reported income, which reduces most taxpayers’ tax liability.”

Earlier this year, the Las Cruces Sun-News editorialized in favor of tax expenditure reports, saying, “But without accurate data, it’s impossible to reach an informed conclusion. The state is spending millions of dollars each year in tax incentives. There should be the same accountability with that money as there is with other state spending.”

One estimate puts tax expenditures at $5 billion

While debate may turn vigorous between tax policy experts and rival political think tanks over how and when – or even if — to use exemptions and credits to achieve policy goals, support for a state producing a tax expenditure report transcends political philosophy.

The Center for Budget and Policy Priorities and the right-leaning Washington-based Tax Foundation don’t agree on much, but both organizations agreed Wednesday that it didn’t make much sense that New Mexico does not provide a tax expenditure report, especially in light of its financial straits.

“A tax credit for energy efficiency in your home, that may not be viewed the same as a spending program, but it comes with a cost,” said Natasha Altamirano of the Tax Foundation.

While there is no official tally of how much is spent on tax expenditures, there have been some estimates. New Mexico Voices for Children last year estimated total tax expenditures at more than $5 billion.

And judging by how much New Mexico has “spent” since 2003 on a single tax credit program – the Business Incentive Tax program – hundreds of millions of dollars, if not more than a billion dollars, each year never flows into the state’s coffers. The Business Incentive Tax Program alone is expected to cost the state nearly $300 million in unrealized revenue from 2003 to 2009, according to a report submitted last month to a legislative committee by the state’s Taxation and Revenue Department. More than $111 million of that $300 million is projected to come in 2009 alone. And the bulk of the tax credits — $105 million of the $300 million in unrealized revenue – went to film production companies, the report shows.

Report could “confuse” the public

There have been past efforts to authorize the creation of a tax expenditure report. A bill made it to Gov. Bill Richardson’s desk in 2007 that would have required the state’s Taxation and Revenue Department to issue an annual list of all the tax revenue that is not collected. Richardson vetoed it.

In addition, private sector and government officials in New Mexico have argued against such a report. For starters, tax policy is incredibly complex, they say. One concern is that the public won’t understand the need for some exemptions. It is standard practice for governments to use exemptions, deductions and tax credits sometimes to encourage or discourage behavior. For example, many states have tax credits and exemptions to spur economic development, or the purchase of more fuel-efficient vehicles.

But New Mexico officials also have evinced a worry that the public won’t understand the use of some exemptions as a way to correct the tax code. With taxes, there is always the potential for “pyramiding” or “cascading,” that is, over-taxing certain components that go into making larger goods.

For example, a necessary piece of equipment that goes into the construction of manufacturing machinery could be taxed when it is purchased and again after the machine is sold as one complete unit. Exemptions protect against that part – or input or raw material – from being taxed at several stages of an assembly process. That’s a very legitimate use of exemptions, officials say.

That’s just one example, but there are thousands of others, and trying to untangle that level of complexity to state lawmakers and the public might become too difficult, some have said.

But that doesn’t stop Connecticut from producing a tax expenditure report every two years.

Connecticut’s report could be a model for other states

Connecticut is one of the states cited in a April report by the Center on Budget and Policy Priorities as having a tax expenditure report that could serve as a model for other states.

The rationale for many exemptions in Connecticut’s tax expenditure report – for example, the sale of machinery used in manufacturing — is to reduce “cascading.” And several of those exemptions to reduce cascading have been in Connecticut’s tax code for years.

But the Connecticut tax expenditure report not only tells a reader how much the state spends on exemptions and credits on each major tax – the largest is the sales and use tax, at $2.6 billion each year —it also shows that Connecticut loses $4.4 million each year to a sales tax exemption that applies to the purchase of caskets.

It’s easy to see that the sales tax exemptions for bicycle helmets (at a cost of $200,000 in annual revenue) and vegetable seeds (less than $100,000) might have the effect of encouraging folks to buy helmets and plant gardens.

Similarly, Connecticut gives a sales tax exemption to material, equipment, tools, fuel and machinery used by a hydrogen fuel cell manufacturing facility. The reason: incentive. Connecticut has for several years made an effort to foster its hydrogen fuel cell industry.