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Report: Capital Gains Deduction Ineffective And Unfair

Legislation enacted in 2003 that allows New Mexicans with capital gains income to deduct half of that income from their state taxes has failed as an economic development tool. Further, it makes the state’s overall tax system lean more heavily on low-income families and exemplifies the need for a more robust accounting of tax giveaways. Those are the conclusions of a report released today by New Mexico Voices for Children.

“When this legislation was introduced we were told it would create jobs by bringing corporate headquarters to the state,” said Gerry Bradly, Senior Researcher for NM Voices and report author. “It’s been a decade and we’re still waiting on those jobs. It’s time to repeal this ineffective legislation,” he added. Legislation to do just that is expected to be introduced during the legislative session currently underway.

Almost 90 percent of the capital gains income in New Mexico goes to tax filers with incomes of at least $100,000, and nearly 60 percent goes to those with incomes of $500,000 and higher. A capital gain is the income realized when items like stocks, bonds, and real estate are sold at a profit. It is termed “unearned” income by economists because it does not come from wages or salaries.

“It’s wrong to tax income from wages more heavily than unearned income. This tax give-away is unfair and has no benefit for the vast majority of New Mexicans or the state as a whole,” said James Jimenez, Director of Policy, Research, and Advocacy Integration of the child advocacy organization. “That money would be much better invested in early childhood programs, K-12 education, public health, or aging infrastructure. Those investments would pay off in jobs now and a strong workforce in the future,” he added.

The report also faults the state’s lack of a statutory tax expenditure budget—an annual accounting of all tax credits, deductions, and exemptions. Such reports not only inform lawmakers of the cumulative cost of changes to the tax code, but can help them determine if those laws have had the desired effects. The Legislature has passed such legislation three times, only to have it vetoed each time. Tax expenditure reports subsequently created by executive order have been incomplete.

The report, “New Mexico’s Capital Gains Deduction: A Capital Loss for New Mexicans,” is available online at: http://www.nmvoices.org/wp-content/uploads/2014/01/Capital-gains-tax-report-web.pdf