Crisis management

Posted 2/09/2009 10:00:00 AM

By Carter Bundy

The Legislature and administration should be praised for working together in a cordial, bipartisan manner to fix our fiscal year 2009 shortfall. They did it quickly and they did it in a way that didn’t significantly cut services at a time when people need them more than ever.

But they didn’t do it alone. State employees agreed to a zero percent raise, meaning that after health insurance increases and increases in things like workers’ comp, they’re actually agreeing to a take-home pay cut.

Workers are sacrificing more than pay. There is always some turnover in any large entity, and with the hiring freeze, state employees are being asked to provide the same services or higher levels of services with fewer and fewer people.

Deny services to rural New Mexico?

An analysis by the anti-government, Grover Norquist-affiliated Rio Grande Foundation a few weeks ago tried to portray New Mexico government as “bloated” because we are near the top of the list in employees per capita. What the foundation conveniently ignored is that there’s a strong correlation between population density and employees per capita.

If you live in California, New York or even Texas, you probably live within 30 miles of a city of over 100,000. That means that a state office in, say, Oakland, or Fresno, or Bakersfield, or Riverside, or Sacramento is serving dozens of smaller towns, in addition to its own large population, and enjoys tremendous economies of scale.

We could reduce our numbers, too, if everyone in Hobbs, Las Cruces, Farmington and Clovis decided that they’d be happy to drive to Albuquerque or Santa Fe for services from highway maintenance to MVD to reporting crimes. But New Mexico isn’t just about Albuquerque and Santa Fe, and we shouldn’t be bullied into denying services to other citizens just because people take statistics out of context.

Here are the relevant numbers about how front-line state employees are serving the state: In the last six years, classified state employees have grown from 19,200 to 19,420, an increase of just over 1.1 percent.

Meanwhile, in the seven years between April 2000 and July 1, 2007 (the closest comparable time span) according to UNM’s Bureau of Business and Economic Research, the state’s population has grown from approximately 1.819 million to 2.054 million, an increase of 12.9 percent.

The conclusion: New Mexico’s classified employee civil servants have actually gone down per capita over the last decade, by about 10 percent.

New Mexico’s biggest scam

As the FY ‘10 budget moves forward with even scarier numbers, instead of reducing core services to New Mexicans, the Legislature and administration should go after tax cheats. In particular, it’s well past time to take on multinational corporations that play accounting and legal shell games to avoid state taxes.

Currently, there is a huge loophole in New Mexico’s tax code allowing companies that make billions of dollars in profit in New Mexico to avoid their fair share of tax payments.

The loophole/scam works like this: Let’s say that a big retailer, call it company “W,” makes $100 million in pure bottom-line profit in New Mexico. Whether you like taxes or not, all of our New Mexico and small businesses pay taxes on their profits. So of course, company W ought to pay as well, right? Nope.

What company W has that the small businesses don’t have is an army of lawyers and accountants, as well as national and international infrastructure, that enables them to cheat the system and gain an unfair competitive advantage over law-abiding New Mexico companies.

Company W’s parent company, based in, oh, let’s say Arkansas, sets up a shell subsidiary (usually a holding company or “passive investment company”) in Delaware to “own” the rights to company W’s trademarks.

The parent company then makes sure that the New Mexico operations have to “pay” the Delaware shell company a huge amount of money to use the trademark. That means that instead of New Mexico profits of $100 million, maybe the New Mexico profits are only $50 million, because company W “paid” $50 million for the use of a trademark to a sister company that operates in a state with no corporate income tax.

There are dozens of variations on the scam. Companies pay “rent” to themselves to shift profits overseas or to low- or no-tax states using real estate investment trusts. Companies have a fraudulent subsidiary sell inventory to real subsidiaries at inflated prices to make profits in states like New Mexico look smaller while profits in Delaware balloon.

The answer: combined reporting

How do we end this loophole -- this shell game scam -- which means that New Mexico businesses and individuals pay their full share of taxes but big, rich multinationals pay only a fraction of theirs?

Twenty-one other states representing over 50 percent of our economy have already found the answer: “combined reporting,” sometimes referred to as “unitary taxation.” The New Mexico Blue Ribbon Tax Reform Committee endorsed the idea of combined reporting in 2003. All combined reporting does is make sure that companies pay taxes on the profits generated in New Mexico.

This isn’t an anti-business proposal. According to the Center on Budget Policies and Priorities, only 10 states with a corporate tax have seen a growth in manufacturing jobs between 1990-2006. Nine of those ten states (Arizona, Idaho, Kansas, Montana, Minnesota, Nebraska, North Dakota, Oregon and Utah) had combined reporting, and the 10th, Iowa, has a governor who supports combined reporting.

This isn’t a Democratic proposal or a Republican proposal. It’s a tax fairness proposal to stop punishing local, law-abiding, small- and medium-sized business. Remember the “marriage penalty?” This is the “small business” penalty, and it has to stop.

Our Legislature has done a professional job of finding solutions to our budget crisis. They can add to their list of accomplishments by closing a loophole/scam that has been robbing the rest of New Mexico of billions of dollars over the last few decades.

Bundy is the political and legislative director for AFSCME in New Mexico. The opinions in his column are personal and do not necessarily reflect any official AFSCME position. You can learn more about him by clicking here. Contact him at carterbundy@yahoo.com.