By Mary Alice Murphy

At the Tax Reform forum held Tuesday, Oct. 24, 2017, at Western New Mexico University's J. Cloyd Miller Library, District 38 Rep. Rebecca Dow served as moderator.

"Tax reform is quite the topic in the House and the Senate," Dow said. "I would like to introduce Paul Gessing, president of the Rio Grande Foundation. Our topic tonight asks: Is 2018 the year of tax reform? This year, my first session as your representative, I worked hard on a bill to allow those dying of a terminal disease the right to try pharmaceutical drugs that are still in development, but that might help them."

Gessing said he has been the Rio Grande Foundation president since 2006. "Rebecca works very hard for her district and the state."

"The Rio Grande Foundation is a non-partisan think tank," he said. "We do policy research from a free market, limited government perspective. New Mexico's problems, in my humble opinion, could be solved by a healthy dose of free market and limited government. The best way to do that is through tax reform. 'The power to tax is the power to destroy,' according to John Marshall, one of the country's first Supreme Court justices."

If one looks at the statistics from 1950-2016, "all our neighboring states have grown," Gessing said. "The problems facing New Mexico are not new. They are long-term. Population growth has dropped drastically."

He showed a graph that showed in the decade of the 1970s, the population growth rate was 28 percent; in 1980, 16 percent; in 1990, 20 percent; from 2000-10, 13 percent and; from 2010-16, 1.1 percent. In addition, New Mexico's unemployment rate at 6.3 percent is the second highest in the country. Colorado has an unemployment rate of 2.4 percent; Utah, 3.4 percent; Texas, 4 percent; Oklahoma, 4.5 percent; and Arizona stands at 4.7 percent.

"It's clear it's the state's policies," Gessing continued. "We have much nicer weather than Texas. But New Mexico has a lower percentage of the population employed. The work force participation rate in the U.S. is 59.7; in Utah, 66.4 percent; Colorado, 64.7 percent; Arizona, 57.1; Texas, 60.7; Oklahoma, 58.2; and New Mexico 53.7 percent. Too much of the population is riding in the cart and not enough are pulling the cart."

He said a rise in minimum wage, as some suggest, would require further welfare programs for those who lost jobs as a result.

Gessing noted that the Gross Receipts Tax is charged from the top down at every stage of production of a product, including its sale. "But it's not a sales tax."

The top revenue sources for the state of New Mexico are consumption and business inputs through the GRT at $553 million; income tax at $360 million, including personal and corporate; wealth, as in property; and severance tax from minerals and oil and gas at $192 million.

"New Mexico is not a low tax state," Gessing said. "We are higher than any other western state, except for California."

He noted that Richardson cut the income tax rate from 8 percent to 4.9 percent and New Mexico's property tax is ranked 38th, whereas Texas' property tax, which has no income tax, is the sixth highest.

"I would take the Texas model, if I could," Gessing said. "Most of us don't want to work if we don't have to. We should not be de-incentivizing people from working. The Texas model is superior to what we do in New Mexico. People who can afford higher cost property can afford the taxes on it, but gross receipts tax hits everyone."

He said New Mexico is the third most reliant state on severance tax from mineral and oil and gas extraction. "Wyoming is the highest at 31 percent. New Mexico's share of the state budget is 17 percent, but including pass-throughs, it's close to one-third the budget. When the price of oil goes up, it covers up the ills of the state. In Texas, although it is a big oil state, its oil share of revenue is 5 percent. The state has diversified. And it is a right-to-work state."

New Mexico is the fourth highest in sales and excise taxes, "although it's not a sales tax. It's a gross receipts tax. The New Mexico tax burden is relatively high."

The gross receipts tax came from a state emergency in 1935, in the middle of the Depression. The legislature enacted the Emergency School Tax and imposed it on goods and services at varying rates at around 2 percent.

"We have three military bases, and two national labs, and yes, they are taxed GRT, too," Gessing said. "We also had petroleum reserves that could be taxed."

He said it's lobbyists who get the exemptions and carve outs for specific industries.

Gessing said Rep. Jason Harper is the driving force in legislative tax reform. "He works at Sandia Labs and uses his math skills to work on tax reform."

Harper's latest bill wants tax reform to be revenue neutral, close loopholes and exemptions, such as the grocery tax, non-profit purchases and insurance companies. He wants to lower rates to about 4 percent statewide, and eliminate pyramiding of taxes.

"For instance, Presbyterian Hospital is a non-profit, so it doesn't pay taxes, but Lovelace is for-profit and has to pay taxes. Is that fair?" Gessing asked.

He said that in oil and gas, gross receipts taxes are required to be paid at the well head, for shipping crude and for production. "That's pyramiding, even when it's within the same company."

Gessing said Harper's 400-page document is not an easy read. "We don't need more cheese; we need to close off the holes in the cheese."

New Mexico state government needs money, so it taxes homes, toilet paper, feminine hygiene products and gasoline. All are personal essentials.

"We want people to get to work, so they need gas, not keep them at home, because they can't afford it," Gessting said. "These are essentials in the same way as groceries, but lobbyists got them untaxed. How about reinstating the food tax at a lower rate across the board? Everyone has to eat, but the poor have access to SNAP."

He asked and answered why New Mexico still has the GRT. "Under federal law, a state cannot tax the federal government. The U.S. government told New Mexico it wasn't going to pay taxes, but a Supreme Court decision said that the state could tax federal contractors."

"Yes, the state would forego a lot of revenue if it cut GRT," Gessing said. "Sandia went from Lockheed to Honeywell. But Los Alamos is looking at being managed by a consortium of universities. Under state law, the state would lose millions of gross receipts taxes if a non-profit takes over Los Alamos."

Another exemption is if an employee does not live in the state, the employer does not have to pay gross receipts or vice versa, if the employer is out of state, it does not have to pay GRT to the employee living in New Mexico. "Why would I come to New Mexico and to have to pay 7 percent to 8 percent more to any contractor in the state?"

Why not another reform model? he asked. Such as a total tax reboot, where everything is taxed at 20 percent, including income. "That's scary."

"Harper's plan is a moderate plan," Gessing opined.

Another possibility is to abolish the GRT and go to a straight sales tax. A third option is to eliminate the income tax and be like Texas. A fourth option would raise property taxes and reduce other taxes. Another option that has been proposed is to use part of the "permanent fund" as a bridge fund. "The left says to use it for pre-K education."

"Our problem is not inadequate revenue or taxes," Gessing said. "I'm not a big fan of permanent funds and having government invest in things like Microsoft. No, New Mexico is worse. It invests in start-ups that go under like Eclipse Air.

"If we tap the permanent fund, it will not be to reduce taxes, so I don't want to take from the permanent fund," Gessing said.

He quoted Russell B. Long who said: "Tax reform means: 'Don't tax you, don't tax me, tax that fellow behind the tree.'"

Cindy Provencio, who said she is a candidate for District 2 County commissioner, asked a question about Harper's bill. "If it gets rid of the tax exemption for non-profits, how would that affect religious organizations and their ability to talk about politics?"

Gessing said they would have to pay tax on purchases, but he didn't know how it would affect politics, which is a free speech issue.

Linda Pecotte asked how to get more information on Harper's bill.

"He had a couple of bills in 2016 and another in 2017," Gessing said. He suggested going to the New Mexico Legislature website to find them.

"The Rio Grande Foundation has a position paper on this year's proposal, within the past week or so," Gessing said. "The state appropriated $400,000 to Ernst & Young to study Harper's plan and how it would affect the state. Our position paper will be more general. Ernst & Young's will be more analytical. We are getting a lot of push back on putting tax back on groceries. I don't know if anyone has a better solution for that."

Peter Burrows asked how many state people it takes to process the gross receipts tax.

"I don't know, but I do know there are serious problems with enforcement," Gessing replied. "The state takes it in and the disperses it back to the communities. I talked to Greg Hall, Rio Rancho mayor, who he said he dealt with an audit on his small business a while back on the use of the non-taxable transaction certificate. They tried to hold him accountable for possible fraudulent use of the certificate. I don't like it when the state enforces it on small business owners, but the state is not enforcing itself on its processes."

Linda Beattie asked if it would make tax reform more palatable to just charge GRT of 4 percent across the board. "Would it be possible to put in a lower food tax?"

Gessing said he didn't think any proposal included a step down for food. "We've had the gross receipts tax for decades, so we had the saga of Hold Harmless. When Richardson did away with the food tax, the state added ½ cent to everything. That half cent went to the state, but didn't fund anything at the municipal level. Governor Martinez made the change at the end of a session, actually, just after the session ended by the clock, to give municipalities some leeway."

Bernalillo county got six times the leeway than what it needed, he said.

"It's like squeezing a part of a balloon," Gessing said. "The government takes more of its share and provides a disincentive to work."

Harry Browne said, as a county commissioner, he pays more attention to the property tax. "We received $7.6 million in property tax and $2.6 million in gross receipts tax. I think New Mexico belongs, instead of in ninth place, it should be in fourth. We have to shape the balloon in tax fairness. Property taxes need lots of reform. If you run cattle, the land is taxed at one-third. If you run horses, the property is taxes at full value. Is there any chance of property tax reform?"

"Mostly in urban areas," Gessing said, "there is tax lightening, especially when property values soared. The hope of changes in gross receipts tax is that it can generate economic growth. When you talk property taxes, users do different things with property. It's always hard to tell people your taxes are going up by 25 percent and for another group, it's going down 25 percent. We have relatively low property taxes in New Mexico, especially for those who are paying property taxes on their second, third or fourth house. Retirees are not looking to pay more property taxes, and young people are leaving."

William Perkins, candidate for Sixth Judicial District Court Judge, asked how much of the state's income comes from federal grants and "are they possible to plan for?"

Gessing said former Gov. Gary Johnson saw a spending increase, but "he was a piker compared to Richardson. Martinez saw an uptick and then a downtick in revenue. "There has been a slight trend up for the General Fund. In 2012, total New Mexico expenditures were $17 billion; in 2015, 20 billion. As for federal spending, the federal government spends a lot more money here than in a lot of other states. The largest portion is for Medicaid. When you put in federal dollars, you see growth in a program, such as Medicaid."

"New Mexico has to have a balanced budget," Dow said. "It's required in the constitution. We spend what we have. Did the spending go up along with oil and gas revenues?"

"Partially, but we hit the peak of oil and gas revenues in 2012-13," Gessing said. "We have never recovered, as a state, from the Great Recession. There are a lot of different factors we still face, including too much government dependence and too few in the workplace."

Dow said there is a will among both parties to reform the tax code. "You've showed the correlation of New Mexico to the other western states that are our neighbors. What are the differences?"

"All of our neighbors are right-to-work states," Gessing said, "except for Colorado, which is not nominally a right-to-work state, but gives taxpayers rights."

He said right-to-work is spreading. "Since 2012, Indiana, Minnesota and Wisconsin have become right-to-work states. West Virginia is a new one. Kentucky passed it this year, and Missouri passed it, but the unions oppose it and got a ballot measure on the issue in 2018."

Gessing said most countries are seeing a decline in employment numbers, because of baby boomers retiring, and because of the opioid crisis.

"Six states saw an increase in employment numbers, three of which are right-to-work states," he said. "In a survey of CEOs, 78 percent say it's preferable to be in a right-to-work state or they will only have a business in a right-to-work state.

"I would love to see it develop locally," Gessing said. "Colorado has a taxpayers' bill of rights that the government may not grow by more than the combined inflation and population growth. It has frozen the size of government. Colorado has to go to the voters, if it wants a tax increase."

Gessing said his wish list for New Mexico is right-to-work and a taxpayer bill of rights.

Dow asked, if tax reform is bi-partisan, "what were the issues that neither side would give on?"

Gessing said the Democrats will not give on a tax on groceries.

"The theory is that lower income people would pay more," Dow said. "But Republicans say the lower income people are now seeing more taxes than when there was a food tax. The lower income people have an EBT card or SNAP."

Gessing said: "The Rio Grande Foundation and Voices for Children were once simpatico on the issue, but Voices had now gone the other way."

"There are a lot of items that could be eligible for a tax increase or decrease," Gessing said. "Depending on where you do your online shopping, you are taxed, but on some, you are not. For a Quill wall calendar, in the days before the internet, you sent off a check. The Supreme Court said, in order for New Mexico to tax it, the company had to have a tangible presence in New Mexico. You, as a citizen, were supposed to fill out a compensating tax form. How many of you did?"

He said the state is trying to soften the Supreme Court decision. "Amazon is now having distribution centers in every state. It gives me heartburn to think about what needs to be done to get those last few millions of dollars."