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AVOIDING RISK:ECONOMIC GROWTH

STRATEGIES

SANTA FE, NMMARCH 29, 2018

Presented by Kyle Compton, Billy Leung, V.P. & Peter Evangelakis, Ph.D.Regional Economic Models, Inc.

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Current Economic Landscape

Positive economic conditions:

Low unemployment

Modest inflation

Future risks:

Rising interest rates

State and local fiscal health

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Future Opportunities & Challenges

Economic Development

Understanding strengths and weakness of a state economy

Providing incentives to lure companies

Tax Reform

Removing exemptions from New Mexico’s Gross Receipts Tax

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REMI Analysis

REMI is the industry standard for dynamic regional economic, demographic, and fiscal analysis of transportation, economic development, and other public policy projects.

North Carolina: Medicaid expansion analysis

Arkansas: Big River Steel manufacturing facility analysis

Maryland: Corporate tax rate reduction analysis

Washington: Aerospace tax credit analysis

Indiana: Analysis of commuter rail extensions from Chicago into NW Indiana

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Economic Development

Evaluating the fiscal and economic effects of tax incentives:

Amazon’s search for HQ2 is inspiring debate over the value of incentives

The tech giant announced short list of 20 possible locations

Leaders of states and cities are competing to offer the most attractive terms

Fiscal and economic modeling provides insight to the cost-benefits of offering incentives

Photo: Amazon

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HQ2 Potential Sites

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New Mexico’s Economy 2017

Top 3 industry sectors:

By output (in Billions of fixed 2016 dollars):

1. Real Estate (rentals & leasing) - $21B

2. Mining - $15B

3. Health Care - $13B

By employment (including average annual compensation in fixed 2016 dollars):

1. Health Care – 140K ($45,000)

2. Retail – 122k ($29,000)

3. Accommodation & Food Services - 244k ($21,500)

Cost of Living in New Mexico

Consumer price index is 20th most expensive (5.98% lower than national average)

Relative Housing Price is a little less than half (38.31% lower than national average)

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Amazon: Phases of Economic Impact

Construction

Hire construction workers for first 5 years to build facility

Purchase computers/servers, office furniture/equipment

Operations

Two scenarios:

50k employees

2.5k employees (more modest estimate)

Economic impacts

Fiscal impacts

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Phases of Economic Impact

Construction

50,000 employees

Operations

2,500 employees

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Tax-PI Analytical Approach

“Conventional analysis of proposed legislation…does not incorporate effects on the economy… trying to account for such effects may increase the likelihood of producing an accurate answer.”

Keith Hall, Director, Congressional Budget Office

Tax/Spending Change

Direct or “static” fiscal impact

Change in business and personal

incentives

Observed behavioral response

Change in tax base and spending determinants

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Fiscal Impacts (50k Jobs)

$12.9 billion cumulative increase in revenues

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Fiscal Impacts (2.5k Jobs)

$869 million cumulative increase in revenues

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Tax Reform

“Faltering state tax revenues are linked to a downturn in the oil sector, economic malaise and the nation’s highest rate of unemployment.”

-Las Cruces Sun News, 2017

Opportunities

Decrease reliance on oil prices

Promote economic growth/job creation

Simplify tax code

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Targeted Tax Reform:Gross Receipts Tax

Gross receipts tax base rate 5.125%, as high as 8.6875% based on county and municipality options Broad tax bases allow GRT’s to raise revenue with low rate

Offering exemptions necessitates rising rates, hurting non-exempt industries

Exemptions provide benefit for regionally significant industries

Risk of pyramiding

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Gross Receipts Tax Reform:Healthcare

Health Care Practitioners “Legislators on Tuesday were concerned about proposals to do away

with several deductions, including one for health care practitioners that shields $1 billion each year from gross receipts taxes.”

-U.S. News and World Report

HB 202 (2017): Not-for-profit/publicly funded hospitals “Most affected would be Presbyterian, which would provide

about one-third of the projected revenue by virtue of its hospital system’s market share.”

-Albuquerque Journal

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Modeling Gross ReceiptsTax Reform

160 Sector New Mexico Tax-PI v2.1

Calibrated to NMDFA Gen. Fund 2017 revenue est.

2 simulations: $1bn consumer price increase to physician services and to hospitals, with $1bn offset through GRT base rate reduction

Assumptions

(Non-induced) revenue neutral

Price increase borne by consumers rather than businesses

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Physician ServicesExemption Removal

• 6.3 thousand fewer jobs than baseline• Emigration rises to 6.3 thousand• $1 billion output lost• $150 million disposable personal income lost

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Physician ServicesExemption Removal

• Demand for health care and social services declines $1.2 billion• Rest of economy only gains $200 million in demand

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Physician ServicesExemption Removal

• Output by sector shows mixed results for output• Retail trade large output increase ($100 million)• Construction loses from outmigration ($38-10 million)• Administrative, professional and scientific, and management sectors lose

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Physician ServicesExemption Removal

• $340 million lost revenue over first 10 years• Represents 0.4% of annual budget lost

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Hospital ExemptionRemoval

Hospital exemption• 6.4 thousand jobs created• 12.3 thousand immigrants • Output increases $800 million• $500 million disposable personal income

created

Physician service exemption• 6.3 thousand jobs lost• 6.3 thousand emigrants• Output decreases $1 billion• $150 million disposable personal income

lost

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Hospital ExemptionRemoval

• Same consumer price increase leads to $1 billion less decline in healthcare demand• Demand in rest of economy increases by $1.2 billion more than during

physician service exemption

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Hospital ExemptionRemoval

• $470 million induced revenue over first ten years• Gross Receipts Tax revenue increases $170 million• Personal Income Tax revenue increases $80 million• Compare to loss of $340 million

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Hospital ExemptionRemoval

• Consumer price increase creates much steeper decline in demand due to differing price elasticities

• Adjustable given regional estimates

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Who bears the cost oftax increases?

“Although the gross receipts tax is imposed on businesses, it is common for a business to pass the gross receipts tax on to the purchaser either by separately stating it on the invoice or by combining the tax with the selling price.”

-New Mexico Department of Taxation and Revenue

“Gross receipts taxes and other taxes levied on business inputs have been shown to result in “forward shifting” of costs on to final consumers.”

-Tax Foundation

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Who bears the cost oftax increases?

• Very similar picture• 500 more jobs created, $400 million additional output• Less immigration, similar disposable personal income