A study by the Pew Center on the States on state tax incentives uses New Mexico’s high wage tax credit as an example of a problematic tax incentive that has cost more than previously thought.
The Albuquerque Journal reported on the soaring amount of claims by businesses for the credit in May of 2012.
Two bills that would have tightened requirements for the tax incentive failed in the 2012 session — but are likely to make a return in the 2013 session.
The Pew report says that the tax incentive is growing in cost to the state without the corresponding economic growth it was supposed to provide.
New Mexico’s High-Wage Jobs Tax Credit—an incentive that rewards businesses for creating jobs that pay well—cost the state $9.3 million in fiscal year 2011. A year later, the price tag had more than quintupled to about $48 million. That might have been a positive development if it signaled an economic boom and showed that the credit was working—but there was no matching increase in high-wage jobs. Instead, state officials believed the costs were rising primarily because businesses were learning they could claim credits for jobs they had created years earlier without knowing about the tax credit. While this was permitted under the program’s rules, it meant that some companies were receiving a financial benefit for something they would have done anyway. New Mexico suddenly had a tax incentive on its hands with costs that were growing dramatically without the corresponding economic gains lawmakers had in mind.
The report says that in addition to proper estimates of the costs of tax incentives, states also need to have annual cost controls to make sure the incentives don’t begin to balloon out of control.
“States should consistently use these two tools together to ensure that tax credits, exemptions and deductions for economic development are affordable and manageable from day one,” said Jeff Chapman, research manager at the Pew Center on the States. “When policymakers create tax incentives without knowing the expected costs and guarding against economic changes beyond their control, they leave their states vulnerable to budget pressures that are entirely avoidable.”
New Mexico’s high wage tax credit is used as an example of a tax incentive that hasn’t reached these criteria.
The full report is embedded below.