Executive summary
Significant tax changes may have to wait
On April 7, 2023, New Mexico Gov. Michelle Lujan Grisham used her line-item veto on House Bill 547, preventing sweeping changes to the state’s tax code while leaving in place individual tax rebates. Included in the veto of the omnibus tax bill was a reduction of the state gross receipts tax (the sales tax), corporate and individual tax rate changes and adoption of single-sales factor apportionment.
Approved provisions
The governor approved one-time rebates of $500 for single filers and $1,000 for joint filers who filed an income tax return for the 2021 tax year. Also approved was an expanded child tax credit and an expansion of the film tax credit. The vast majority of the remaining portions of the bill were vetoed.
Tax changes vetoed
Gross receipt tax changes
Currently, the New Mexico state gross receipts tax (sales tax) rate is 5% through June 30, 2023, and 4.875% thereafter. The rate is on a scheduled reduction from an original 5.125%. Those reductions have been one of the few cuts to a state sales tax rate in the country in recent years. House Bill 547 proposed to extend that reduction schedule through 2026, ultimately achieving a rate of 4.375%. However, the reductions would not have been automatic and required certain revenue triggers. Local tax rates would have been unaffected by the legislation.
Corporate income tax changes
House Bill 547 would have generally adopted single-sales factor apportionment effective Jan. 1, 2024. New Mexico would have been the third state to adopt single-sales factor this year after Montana adopted the apportionment change effective in 2025, and Virginia an expanded single-sales factor for certain retail groups.
The bill also proposed changes to the corporate tax rate effective Jan. 1, 2024. The current corporate tax rate is imposed at a flat 4.8% for income of $500,000 or less, and 5.9% for income over $500,000. The bill proposed to eliminate the lower bracket completely, imposing the 5.9% rate on all corporate net income.
Individual income tax changes
Changes to the individual income tax include increasing the number of brackets for each filer from five to six. The new brackets would have imposed the tax at a lower effective rate on some taxpayers by offering more brackets with a lower rate than what was currently imposed.
In addition, the bill would have exempted social security payments from New Mexico income tax. A growing number of states are exempting this particular retirement income from state individual income tax.
Finally, there were changes proposed to the net capital gain deduction. Currently, a 40% deduction is allowed for taxpayers’ capital gain income. The legislation would have limited that deduction to $1,000,000.
Takeaways
The omnibus tax bill would have been one of the most significant for both the state and nationwide to this date. If the entire bill was approved by the governor, New Mexico taxpayers would have received over $1 billion in tax cuts. The governor’s veto runs counter to the tax cutting trend of the past three years. Despite the economic uncertainties, numerous states have reduced personal and corporate income taxes and several states are still considering tax reductions this year. This trend began during the pandemic when states unexpectedly had budget surpluses created by federal aid and strong sales and use tax revenue growth. It has continued unabated as the economy improved and shows little sign of slowing at this time. It should also be noted that the governor mentioned the sustainability of the tax cuts in context of the uncertain economy and inevitable economic downturn. That talking point has become more frequent among state tax policymakers as pandemic aid has ended and inflation continues to endure.
The decision to veto single-sales factor apportionment was particularly interesting. States have been moving toward singles-sales factor apportionment for decades – a development usually strongly supported by in-state businesses with significant property and payroll. The legislation’s fiscal note did not assign a revenue impact for the potential change but noted it would have been negative.
The bill passed each chamber with at least the two-thirds vote required to override the veto. However, it is unclear if the legislature will take up the effort with the session adjourned for the year, or to use a rare provision that would allow the legislature to call itself into session before the next general session. New Mexico has enacted other tax provisions this year such as a refundable credit for pass-through entities. Taxpayers with questions should contact their New Mexico state and local tax advisor for more information or for the status on a potential veto override.
