A Better Alternative: New Mexico Prioritizes Targeted, Temporary Tax Cuts

State legislative sessions are in full swing and the drive to cut taxes has not been more ubiquitous in recent memory. Whether it’s a genuine response to the pandemic, a need to ease inflation concerns, or just an opportunistic chance to cut taxes for the already wealthy, temporary revenue surpluses have many state leaders considering a number of ways to cut taxes.

New Mexico stands in stark contrast to the many examples of poorly targeted tax-cut proposals currently being considered around the country, including Idaho’s newly enacted $600 million tax cut, Iowa‘s hastily approved switch to a 3.9 percent flat tax, and the misguided attempts to phase out the income tax in Kentucky and Mississippi. These options are short-sighted and will do little to grow state economies or address the glaring need to strengthen communities during these uncertain times.

Lawmakers in the Land of Enchantment added to the progress made in 2021 and passed a tax compromise that not only navigated through a mix of competing goals and election year pressures, but leveraged their tax system by using policy options aimed at minimizing revenue loss and maximizing the impact on those who need it most. Specifically, House Bill 163, made several changes to the state’s tax code, including:

• Exempting individuals with incomes at or under $100,000 and joint filers earning $150,000 or less from income tax on Social Security benefits.
• Reducing the state’s gross receipts tax by one-quarter of a percentage point from 5.125 percent to 4.875 percent.
• Providing a one-time refundable income tax rebate of $250 for single filers earning less than $75,000 and $500 for married couples earning less than $150,000.
• Creating a temporary Child Tax Credit (CTC) of up to $175 per child.

The changes may seem like standard tax cuts that will reduce revenues, but New Mexico lawmakers wisely included provisions to ensure that the cuts won’t reduce state revenue and are reasonably targeted to those most in need. For example, if gross receipts tax revenues drop below 95 percent of the year prior, an automatic trigger will bump the rate back to 5.125 percent. Choosing to go with a small reduction to the gross receipts tax (the state’s version of a sales tax) is far more progressive than the personal income tax cuts under consideration in other states.

Moreover, while several lawmakers, including Gov. Michelle Lujan Grisham, wanted to eliminate income tax on Social Security benefits, they ultimately decided on a pared-back, more targeted version. The money saved from not eliminating the tax will help cover the cost of a new Child Tax Credit.

The one-time tax rebate and CTC, meanwhile, are targeted and provide a greater benefit to lower-income families. Most importantly, however, both the rebate and CTC are refundable, which will help New Mexico residents with the least amount of income manage increases in the costs of goods and improve the state’s position as the state with the third-highest level of child poverty.

New Mexico should be held up as a prime example of how states should navigate competing priorities and make decisions on how to manage revenue surpluses to provide assistance to residents based on the impact it will have on those struggling most, rather than worsening already lopsided state tax codes with regressive tax cuts.

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