Candice Horbacz
A recently passed bill in the New Mexico legislature, Senate Bill 151 (SB 151), is set to significantly alter the state’s corporate tax environment, sparking considerable debate among economic policy experts and business advocates. The legislation signals a notable divergence from key federal tax provisions designed to foster business investment and growth, particularly by rejecting elements of the federal One Big Beautiful Bill Act (OBBBA). At the heart of the controversy are provisions that would eliminate state-level conformity with 100 percent bonus depreciation for machinery and equipment under Internal Revenue Code (IRC) Section 168(k) and immediate expensing for qualified production property under the new Section 168(n). Furthermore, SB 151 proposes to include net CFC-tested income (NCTI) in the state’s taxable base, a move that critics argue will lead to genuine double taxation for multinational corporations operating within the state.
The Retreat from Pro-Growth Expensing Policies
Central to the federal OBBBA was the expansion of full expensing, commonly known as 100 percent bonus depreciation. This policy allows businesses to immediately deduct the entire cost of eligible investments, such as new machinery, equipment, or certain technology, in the year they are placed into service. This contrasts sharply with traditional depreciation schedules, which require companies to spread these deductions over many years, often a decade or more, according to complex tables. The economic rationale behind full expensing is multifaceted and widely supported by pro-growth tax reform advocates. By permitting immediate deductions, the policy aims to eliminate a bias in the tax code that discourages capital investment. Under a system of delayed depreciation, inflation erodes the real value of future deductions, and the time value of money means a dollar today is worth more than a dollar tomorrow. Full expensing neutralizes these distortions, effectively making the tax treatment of capital investments similar to that of ordinary business expenses.
Economists frequently point to several benefits of full expensing. It lowers the cost of capital, making investments more attractive and increasing the probability that new projects will be profitable. This, in turn, incentivizes companies to invest more in productive assets, which is a critical driver of economic growth. Greater capital investment leads to higher worker productivity, which translates into increased wages and more job creation. By accelerating deductions, full expensing encourages businesses to modernize their operations, adopt new technologies, and expand production capacity. For a state like New Mexico, which seeks to diversify its economy and attract innovative firms, such incentives are often considered crucial.
While the adoption of full expensing policies can entail an initial "revenue cost" during a transition period—as new immediate deductions overlap with the ongoing depreciation of legacy assets—these fiscal impacts are generally temporary. Over the medium to long term, the policy is often considered fiscally neutral. It primarily shifts the timing of tax payments rather than permanently reducing the overall tax liability over an asset’s lifespan. Once the depreciation periods for older assets conclude, new investments receive full upfront expensing, with no subsequent deductions. The core argument is that the economic benefits—increased investment, productivity, and wages—outweigh the short-term revenue adjustments. By decoupling from this federal standard, New Mexico risks placing its businesses at a competitive disadvantage compared to those in states that maintain conformity with the OBBBA’s expensing rules, potentially deterring capital investment and hindering new business formation and expansion within its borders.
The Contentious Inclusion of Net CFC-Tested Income (NCTI)
Beyond its stance on expensing, SB 151 introduces another significant and controversial change: the inclusion of net CFC-tested income (NCTI) in New Mexico’s corporate tax base. This provision involves taxing certain foreign earnings of controlled foreign corporations (CFCs) at the state level. This move aligns New Mexico with a federal provision (IRC Section 951A) that aims to discourage profit shifting by multinational companies to low-tax foreign jurisdictions and ensure a minimum level of taxation on international income. At the federal level, mechanisms like foreign tax credits are available to prevent or mitigate double taxation when foreign tax rates exceed the minimum threshold.
However, a critical distinction arises at the state level: New Mexico’s proposed legislation offers no such credit for taxes already paid abroad. This omission creates a genuine risk of double taxation on the same foreign income. For U.S.-based multinational corporations with operations in New Mexico, this means their foreign earnings could be taxed once by the foreign jurisdiction, then again at the federal level, and a third time by the state of New Mexico, without any corresponding relief. This puts New Mexico-based multinationals at a significant disadvantage compared to their international competitors, who may not face such a layered tax burden.
Evolution from GILTI to NCTI and Aggressive Taxation
The inclusion of NCTI is particularly notable given New Mexico’s previous non-conformity with the federal global intangible low-taxed income (GILTI) system, which NCTI replaces. Historically, New Mexico adopted a fiscally sound approach by not seeking to tax income earned outside the United States under the GILTI provisions. The GILTI regime, introduced as part of the 2017 federal tax reforms, aimed to tax "supernormal" returns—earnings above a 10 percent return on qualified business asset investment (QBAI)—from foreign subsidiaries, exempting anything below that threshold.
The transition from GILTI to NCTI, as reflected in SB 151, exacerbates the problem for states that choose to include such foreign income in their tax base. A key change under NCTI is the elimination of the QBAI exclusion. This means that under NCTI, all corporate income from controlled foreign corporations, not just the "supernormal" returns, falls under the state’s tax purview. This represents a more aggressive and expansive approach to taxing foreign-source income than the previous GILTI regime.
Moreover, state-level adoption of NCTI taxation carries an additional, often overlooked, complication: foreign tax credits allowed at the federal level can inadvertently be picked up as additional income to be taxed at the state level. This effectively expands the state tax base even further, leading to a more aggressive taxation scheme than under GILTI. This complex interaction between federal and state tax codes creates an environment of increased tax burden and administrative complexity for businesses.
Inefficiency and Behavioral Responses
Beyond the questions of fairness and justification, taxing NCTI or GILTI at the state level is often criticized as inefficient. Multinational corporations are highly responsive to tax incentives and disincentives. Faced with the prospect of genuine double taxation on foreign income, companies may restructure their operations to minimize their sales apportioned to New Mexico. This could involve using intermediaries or shifting invoicing to affiliates in more favorable tax jurisdictions, thereby curtailing their corporate tax liability in New Mexico. While New Mexico’s apportionment formula for corporate income also includes payroll and real property owned by the corporation, the incentive to reduce the sales factor could still lead to reduced economic activity within the state.
While the direct revenue contribution from taxing NCTI (or GILTI previously) to overall state revenues is typically marginal—often a negligible share—its impact can be disproportionately pronounced for the very enterprises that policymakers often seek to attract, such as innovative firms driving economic expansion. These are often the companies with significant international operations and complex global supply chains. Imposing such a tax burden can deter these high-value businesses from investing, expanding, or even maintaining a significant presence in New Mexico, ultimately stifling economic growth.
In light of the federal transition from GILTI to NCTI, many tax policy experts advise states currently taxing this form of international income to seize the opportunity to disengage from it entirely. For New Mexico, adopting NCTI as a new source of revenue is viewed by critics as a strategic misstep that could unnecessarily erode the state’s tax environment and competitive standing.
Legislative Journey and Stakeholder Reactions
The passage of SB 151 through the New Mexico legislature marks a significant pivot in the state’s approach to corporate taxation. The bill’s journey involved deliberations within various legislative committees, where proponents likely emphasized the need for revenue generation and a perceived broadening of the tax base. However, these discussions have been met with considerable apprehension from the business community and economic policy organizations.
Business advocacy groups, such as the New Mexico Chamber of Commerce and various manufacturing associations, have voiced strong concerns. They argue that decoupling from federal bonus depreciation provisions will raise the cost of doing business in New Mexico, making it less attractive for companies looking to invest in new equipment or expand their facilities. These groups contend that the long-term economic benefits of capital investment, including job creation and wage growth, far outweigh any short-term revenue gains from accelerated tax payments. "This bill sends a clear message that New Mexico is less interested in fostering business investment and more interested in expanding its tax reach," stated a representative from a leading business council, inferring typical reactions from such bodies. "We risk losing out on crucial capital and job opportunities to neighboring states that maintain pro-growth tax policies."
Economic experts and non-partisan think tanks, including the Tax Foundation, have also weighed in, highlighting the potential for diminished competitiveness. They point to the complexities and inefficiencies introduced by state-level taxation of foreign-source income without corresponding foreign tax credits. "The lack of foreign tax credits for NCTI creates a scenario of genuine double taxation that puts New Mexico-based multinationals at a severe disadvantage," commented an economic analyst, reflecting the views of experts. "This will inevitably lead companies to reconsider their operational footprint in the state or restructure to minimize their tax exposure, neither of which benefits New Mexico’s economy."
Conversely, proponents of SB 151 within the legislature may argue that the changes are necessary to ensure a fair and robust tax system, potentially citing the need to prevent tax avoidance or to generate revenue for essential state services. They might contend that all income earned by corporations operating in the state, directly or indirectly, should contribute to the state’s coffers. However, the economic analysis provided by independent organizations often challenges the long-term efficacy and economic wisdom of such policies, particularly when they diverge from federal standards in a way that creates competitive disadvantages.
Broader Impact and Implications
New Mexico’s corporate tax component currently ranks in the upper half of states in the Tax Foundation’s 2026 State Tax Competitiveness Index, with the state placing close to the middle overall. This suggests a relatively competitive standing that SB 151, in its present form, risks eroding. The bill deviates significantly from principles of sound corporate tax policy by conflicting with the federal objectives behind NCTI inclusion, taxing foreign-source income beyond what the federal base captures, imposing double taxation without relief for foreign taxes paid, and disadvantaging American multinationals operating in the state.
The implications for New Mexico’s economic future are substantial. By decoupling from the pro-growth expensing provisions of the OBBBA, the state could see a slowdown in capital investment. Businesses considering establishing or expanding operations in New Mexico might opt for states that offer more favorable tax treatment for investments. This could impact job creation, wage growth, and the overall pace of economic development. The state’s ability to attract and retain innovative firms, which are often key drivers of economic expansion, could be particularly hampered by these changes.
Furthermore, the inclusion of NCTI in the state tax base could disproportionately affect multinational corporations, which are often significant employers and contributors to the state economy. The added tax burden and administrative complexity could lead to a reassessment of their presence in New Mexico, potentially resulting in reduced investment or even relocation of certain operations.
Lawmakers in New Mexico face a critical juncture. The decisions embodied in SB 151 could shape the state’s economic trajectory for years to come. While the pursuit of revenue stability is a legitimate legislative goal, tax policy experts and business leaders emphasize the importance of adopting pro-growth tax policies that will help recruit and retain the next generation of New Mexico residents and businesses. Unfortunately, critics argue that SB 151, as passed, represents a step in the wrong direction, potentially leaving New Mexico less competitive, both regionally and nationally, in an increasingly competitive economic landscape. The long-term consequences of these tax policy shifts will be closely watched by businesses and economists alike.
