Tax changes over the last several years are expected to cut New Mexico income tax revenue by hundreds of millions of dollars a year, increasing the state’s reliance on gross receipts and oil and gas taxes.
Ongoing state revenue from income taxes will be down $93.5 million in the current budget year, mostly because of the elimination of taxes on social security benefits. The annual loss to recurring income tax will grow to $403 million in FY24 and $415 million in FY25, partly because of an exemption for military
pensions, the creation of the child tax credit and an expansion of tax credits aimed at low-income working families.
Notably, the (state) legislature since 2021 has also given nearly $1.1 billion back to New Mexico residents through onetime rebates.
Changes to the gross receipts tax structure since 2019 have also reduced the revenue generated, with FY23 gross receipts tax revenue expected to be down $45 million, and revenue expected to decline by $147 million in FY24 and $157 million in FY25.
With the income and gross receipts tax changes, including the rebates, the state’s reliance on income taxes is expected to decline in FY23 to an estimated 23 percent of the state’s total income compared with the 30 percent that likely would have been generated without the changes.
Conversely, the state’s reliance on gross receipts revenue is expected to grow to 33 percent from the 30 percent it likely would have been without the changes. Like with large receipts, the share of the state’s revenues generated by direct taxes on the energy industry are expected to grow, from 19 percent to 21 percent. LFC analysis indicates the tax changes benefited lower income New Mexicans more than those in upper income brackets, making New Mexico’s tax structure more progressive. The tax burden borne
by the top five percent increased slightly, while the burden borne by the other 95 percent dropped significantly.
The Legislative Finance Committee (LFC) is chaired by state Rep. Patricia Lundstrom, D-McKinley, San Juan. The LFC “employs fiscal analysts who examine budgets and review the management and operations of state agencies, higher education institutions and public schools and participate in the state’s revenue estimating process,” according to www.nmlegis.gov/Entity/LFC. “The committee also employs program evaluators to assess the finances and effectiveness of state-funded programs. The LFC staff assists the legislature’s finance committees during the legislative sessions with the General Appropriation Act, which includes revenues, expenditures and performance measures.”
Personal income tax burden carried by upper brackets
The almost half of New Mexico taxpayers who fall into the top two brackets of state personal income tax (PIT) generate almost all PIT tax revenue for the state, partly because the second highest income bracket is so broad it captures 44 percent of all taxpayers, the New Mexico Legislative Finance Committee said in its July 2022 newsletter.
Taxpayers in the three lowest income brackets, capturing single filers earning less than $16,000 a year and joint filers earning less than $24,000, generate two percent of personal income tax revenue.
Taxpayers in the top bracket – individuals earning more than $210,000 and joint filers earning more than $315,000 – generate three percent of total personal income tax revenue.
The second highest bracket, for individuals earning $16,000-$210,000 and joint filers earning $24,000-$315,000, generates 74 percent of PIT revenue.
The LFC said approximately 43 percent of New Mexico taxpayers fall into the state’s first tax bracket, having an annual taxable income of not more than $5,500 and generating no measurable PIT; six percent of taxpayers fall into bracket 2, with a taxable income of $5,500-$11,000 and generating one percent of state PIT; five percent fall into bracket 3, with a taxable income of $11,000-$16,000 and generating one percent of state PIT; 44 of taxpayers fall into bracket 4, with a taxable income of $16,000-$210,000 and generating 44 percent of state PIT; and three percent of taxpayers fall into bracket 5, earning more than $210,000 a year and generating three percent of state PIT.