|
|
From Governing’s
One reason is the 11.7 percent of general fund revenue that comes from oil- and gas-related trust funds. But that’s not the biggest factor. New Mexico is a giant step ahead of most other states in revenue adequacy because it taxes a broad range of services as well as goods. “Manufactured goods are progressively a smaller part of the pie,” says Jim O’Neill, the state’s former director of tax policy. “Unless you tax services, your tax base is going to be shrinking.”
Among the services taxed are those of doctors and dentists, lawyers, engineers and accountants, plus a variety of other activities that are given a free pass in most states. The majority of labor services and repairs are taxed in New Mexico, as are construction contracts and just about all personal services, such as barbershops, laundries and health clubs. The state does an effective job at squeezing money from the federal government, one of its major employers, by using a gross receipts tax instead of a sales tax. It does this because a gross receipts tax is imposed on the seller of a good or a service, not the buyer. So, contractors are taxed on everything they sell to the federal government. The state would otherwise lose these revenues, since the feds don’t pay sales taxes. “New Mexico has adapted really well to its circumstances,” says Helen Hecht, senior manager at KPMG in Albuquerque. New Mexico still has to be frugal; the resources to fund many high-ticket programs simply don’t exist. But thanks to the well-designed revenue structure, the budget is solidly funded. Even amid the current recession, there are operating reserves of about 6.8 percent of general fund expenditures, and trust funds with about $11 billion tucked away. In addition, by depending largely on statewide taxes, New Mexico is able to bear far more responsibility than other states in supporting education. Since 1997, it has reduced the funding disparity between the richest and poorest districts by 81 percent, according to a study by the Education Trust. But even as the tax system has served the state well, the Taxation and Revenue Department hasn’t. The last administration made a grievous error, for example, in the mid-1990s, when it established quotas for auditors based on both the number of audits they performed and the amount of money they raised. The department became overly aggressive, skewed the process of selecting audit targets, and neglected taxpayer education (a cynic might point out that uneducated taxpayers are a rapacious auditor’s best friend). The department recognized some of these problems, and in late 2000, moved the quotas from individual auditors to larger working units. That’s better, but it leaves many of the same problems. Critics still use words like “oppressive” and “inflexible” to describe the department’s methods. “Once they take a position,” says O’Neill, the former tax policy director, “it takes an act of God to get them to change — even if the taxpayer is right.” A heavy-handed approach to compliance is only the start of a litany of problems. Staff cutbacks and poor training have made the department glacially slow in processing returns. Additionally, “it’s difficult to get clarification on the law,” says KPMG’s Hecht, who worked for the department for 11 years. “Even if you’re real assertive, it’s hard to get a good answer.” The state does a reasonably good job at offering electronic filing. Until its switch in 2002 to the tax system that Idaho also uses, other technologies were an albatross. New Mexico purchased a $40 million integrated tax information system in the mid-1990s. After multiple problems, the contractor of the information system was fired in 1999. The department continued implementation on its own, but without adequate expertise. In 2002, it replaced its tax processing product with another, which has better income tax and statistical capabilities. “The difference between the two is like night and day,” according to Ricky Bejarano, deputy director of the Audit and Compliance Division. Newly inaugurated Governor Bill Richardson has pledged to reform the troubled tax department. He also thinks New Mexico could stand some tax cuts: Richardson would eventually like to phase down the top income tax rate from 8.2 percent to 5 percent, and get rid of the sales tax on food and medical services. Those are reasonable goals, but they are sure to eat substantially into revenues and risk causing problems with a system that, compared with those in most of the country, functions quite well. “A lot of us are worried about how we will balance general tax decreases against growing state budget needs, particularly Medicaid,” says one legislative analyst. One way to pay for rate reductions might be by eliminating some current exemptions. A candidate is the exemption from the gross receipts tax for nonprofits. Changing this rule would allow the state to bring in revenue from Los Alamos National Laboratory, which is operated by the University of California. This would treat it in the same way the state treats Sandia National Laboratories, which is privately operated. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
 |
t seems a fair assumption that poor states would have the hardest time bringing in adequate revenue to support their array of responsibilities. But that’s not always the case. Take a look at New Mexico. It has more working poor than any other state, and its overall poverty rate is among the highest in the country. Yet its diverse tax structure serves it remarkably well.