Candice Horbacz
The legislation, Senate Bill 151 (SB 151), represents a significant shift in New Mexico’s approach to corporate taxation. At its core, the bill proposes to eliminate state-level conformity with 100 percent bonus depreciation for machinery and equipment, as codified under federal Internal Revenue Code (IRC) Section 168(k). It also seeks to remove immediate expensing provisions for qualified production property under the new Section 168(n). Furthermore, SB 151 intends to include Net CFC-Tested Income (NCTI) in the state’s taxable base, a move that critics argue could lead to genuine double taxation for companies operating internationally. This package of changes deviates sharply from principles often advocated for fostering economic growth and investment, potentially leaving New Mexico less competitive in the national economic landscape.
Decoupling from Federal Expensing: A Blow to Investment Incentives
One of the most impactful provisions of SB 151 is its decision to decouple New Mexico from federal provisions allowing for 100 percent bonus depreciation, also known as full expensing. Federally, these provisions, largely enshrined by the Tax Cuts and Jobs Act (TCJA) of 2017 and sometimes referred to in principle as elements of a "One Big Beautiful Bill Act (OBBBA)," enable businesses to immediately deduct the full cost of eligible investments in the year they are placed in service. This applies to a wide range of tangible property, including machinery, equipment, and certain other business assets.
Historically, the concept of depreciation has been a complex area of tax law. Instead of allowing businesses to deduct the full cost of an asset upfront, depreciation schedules require deductions to be spread over the asset’s "useful life," which can range from a few years to several decades. While designed to match the expense of an asset with the revenue it generates over time, traditional depreciation methods introduce several economic distortions. They reduce the present value of deductions due to the time value of money and the erosive effects of inflation, effectively increasing the cost of capital investment.
Full expensing directly addresses these distortions. By allowing immediate deduction, it treats capital investments similarly to other business expenses like wages or raw materials, which are fully deductible in the year they are incurred. This approach eliminates the bias against long-lived investments inherent in traditional depreciation schedules. It significantly lowers the after-tax cost of new investments, thereby incentivizing companies to upgrade equipment, expand facilities, and adopt new technologies. For New Mexico, decoupling from this federal standard means that businesses within its borders would face higher effective tax rates on new investments compared to those in states that conform to federal full expensing rules.
The Economics of Full Expensing: Boosting Growth and Productivity
The economic arguments in favor of full expensing are substantial and widely supported by economists across the political spectrum. When businesses can immediately deduct the full cost of their capital expenditures, they are more likely to invest. This increased investment translates into a larger capital stock, which in turn boosts worker productivity. Higher productivity is the primary driver of real wage growth and overall economic expansion. By making investment more attractive, full expensing fosters innovation, job creation, and a more dynamic economy.
Moreover, full expensing simplifies tax compliance. Businesses no longer need to navigate complex depreciation schedules, track asset useful lives, or calculate basis adjustments over many years. This reduction in administrative burden can be particularly beneficial for small and medium-sized businesses, allowing them to allocate more resources to growth rather than tax compliance.
From a fiscal perspective, while adopting full expensing does entail revenue costs during an initial transition period—as new immediate deductions overlap with existing assets completing their depreciation from prior investments—these effects are largely temporary. Over the medium to long term, the fiscal impact tends to be neutral. The policy essentially shifts the timing of tax payments forward rather than reducing the total amount of taxes paid over an asset’s lifetime. Once legacy assets complete their depreciation periods, new investments receive full upfront expensing with no subsequent deductions, leading to a steady state where the policy’s revenue impact stabilizes.
The federal trajectory of bonus depreciation illustrates its perceived importance. Initially introduced as a temporary measure to stimulate investment during economic downturns, its scope and duration expanded over time. The TCJA made 100 percent bonus depreciation available for qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. However, this provision is scheduled to begin phasing down, reducing to 80 percent in 2023, 60 percent in 2024, 40 percent in 2025, and 20 percent in 2026, before expiring in 2027. New Mexico’s move to decouple now, even as the federal provision begins its phase-down, is seen by some analysts as an untimely step that could exacerbate the negative impact on state investment, making it an outlier among states that might seek to retain these incentives for longer.
The Controversial Inclusion of Foreign Income: NCTI and Double Taxation
Beyond the changes to expensing, SB 151 also proposes another contentious tax policy: conforming to IRC Section 951A and including Net CFC-Tested Income (NCTI) in the New Mexico corporate tax base. This decision marks a significant departure from New Mexico’s previous stance and introduces a layer of complexity and potential disadvantage for multinational corporations operating within the state.
NCTI is a component of the federal international tax regime designed to address concerns about profit shifting by multinational corporations to low-tax foreign jurisdictions. At the federal level, the inclusion of NCTI (and its predecessor, Global Intangible Low-Taxed Income or GILTI) aims to ensure a baseline tax on certain foreign earnings of controlled foreign corporations (CFCs). To prevent or mitigate double taxation—where the same income is taxed twice, once in the foreign jurisdiction and again in the United States—the federal system provides foreign tax credits. These credits allow U.S. companies to offset their federal tax liability for income taxes paid to foreign governments, provided certain conditions are met and foreign rates exceed a minimum threshold.
The critical issue for New Mexico, however, is that the state offers no such credit for taxes paid abroad. This absence of foreign tax credits means that if SB 151 passes, foreign earnings of New Mexico-based multinational corporations could be genuinely double-taxed: first in the foreign country where the income is earned, and then again in New Mexico. This puts U.S.-based multinationals with operations in New Mexico at a distinct disadvantage compared to their international competitors, who may not face such cumulative tax burdens.
From GILTI to NCTI: An Escalating Challenge for Multinationals
The shift from GILTI to NCTI at the federal level adds another layer of complexity. It is notable that New Mexico had previously chosen not to conform to the GILTI provisions of the federal revenue code, a fiscally sound stance that did not seek to tax income earned outside the United States. GILTI, introduced as part of the TCJA, aimed to distinguish between "normal" and "supernormal" returns of CFCs. It provided a Qualified Business Asset Investment (QBAI) exclusion, exempting a 10 percent deemed return on certain tangible assets from the GILTI calculation, thereby targeting only the "supernormal" returns.
The federal conversion to NCTI, which replaces the GILTI system, eliminates this QBAI exclusion. This means that if New Mexico conforms to NCTI, it would bring all the corporate income of CFCs under the state’s tax purview, rather than just the "supernormal" returns. This represents a more aggressive and expansive taxation of foreign-source income than even the original GILTI regime.
Furthermore, state-level adoption of NCTI taxation has another profound implication: foreign tax credits allowed at the federal level are often "picked up" as additional income to be taxed at the state level. This effectively expands the state tax base even further, leading to even more aggressive taxation than under the GILTI regime. This unintended consequence arises because state tax codes often start with federal taxable income as a base and then make state-specific adjustments. If federal foreign tax credits reduce federal tax liability but are not recognized as deductions for state tax purposes, they can indirectly increase the state’s effective tax rate on foreign income.
Economic Implications and State Competitiveness
The decision to tax NCTI, particularly without providing foreign tax credits, lacks clear economic justification and can be highly inefficient. Multinational corporations are highly mobile and responsive to tax policy. Faced with genuine double taxation, these companies may respond by restructuring their operations to minimize 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 the state. New Mexico’s apportionment formula, which includes payroll and real property owned by the corporation, might still capture some activity, but the incentive for avoidance would be significant.
While NCTI, like GILTI previously in other states, is likely to contribute only marginally to overall state revenues—typically a negligible share—its impact can be pronounced for the very enterprises that policymakers seek to attract, such as innovative firms driving economic expansion. These are often the companies with significant international operations and intellectual property, precisely the ones that would be most affected by the NCTI provisions. Critics, including business advocacy groups like the New Mexico Association of Commerce and Industry, have voiced concerns that such policies send a negative signal to businesses considering investment or expansion in the state, potentially deterring job creation and economic diversification. They argue that the minimal revenue gain from taxing NCTI would be far outweighed by the loss of potential economic activity and investment.
In light of the federal transition from GILTI to NCTI, many tax policy experts suggest that states currently taxing this form of international income would be wise to seize the opportunity to disengage from it entirely. For New Mexico, which previously did not conform to GILTI, adopting NCTI now would be a step backward, introducing unnecessary complexity and disincentives. Instead of using global income as a new, albeit minor, source of state revenues, lawmakers could focus on policies that genuinely broaden the tax base through economic growth.
Looking Ahead: New Mexico’s Fiscal Crossroads
The 2026 State Tax Competitiveness Index published by the Tax Foundation ranks New Mexico close to the middle overall among U.S. states, with its corporate tax component performing relatively better, ranking in the upper half. However, SB 151, in its present form, deviates significantly from the principles of sound corporate tax policy that typically contribute to such rankings. It conflicts with the federal objectives behind NCTI inclusion by imposing double taxation without relief for foreign taxes paid, thereby disadvantaging American multinationals operating in the state. Moreover, by decoupling from pro-growth expensing provisions, the bill risks discouraging crucial capital investment and new business formation and expansion. This could leave New Mexico considerably less competitive, both regionally and nationally, compared to those states that retain conformity with federal expensing rules.
Economic development agencies and chambers of commerce in New Mexico continually strive to attract new businesses and encourage existing ones to grow. Policies like those proposed in SB 151 could undermine these efforts, making it harder to recruit companies that rely on significant capital investment or have international operations. In an era where states are increasingly competing for talent and capital, a predictable, neutral, and pro-growth tax environment is a critical asset.
Lawmakers in Santa Fe face a crucial decision. They should consider the long-term implications of SB 151 and evaluate whether the short-term revenue considerations (if any) outweigh the potential harm to the state’s economic competitiveness. Adopting pro-growth tax policies that align with federal best practices for investment incentives, while avoiding punitive measures on international income, would help recruit and retain the next generation of New Mexico residents and businesses. Unfortunately, as structured, SB 151 appears to be a step in the wrong direction, potentially hindering New Mexico’s economic progress for years to come. The ongoing debate around this bill underscores the complex interplay between state fiscal needs, federal tax policy evolution, and the imperative for economic growth and competitiveness.
