Great tax race: New Mexico cuts corporate taxes to help diversify economy Susana Martinez, the first Latina governor of any US state, laughs heartily as she recounts how a plan to cut corporate taxes in New Mexico was approved amid great drama within the dying minutes of her state's annual legislative session in late March. "We were all holding our breaths," says the former district attorney, who is known for taking on tough child abuse and drug trafficking cases. Ms Martinez, a 53-year-old Republican who is sometimes mentioned as a dark-horse White House contender in 2016 but denies she is interested, is part of a wave of conservative state governors trying - with mixed fortunes - to cut business taxes to attract and retain investment. "Businesses have choices and they can go anywhere in the world and if we don't provide a business-friendly economy they're not going to come here," says Ms Martinez, who took office in early 2011. But it took weeks of tough negotiations with the Democratic legislature and a final all-night round of tense horse-trading for her to clinch a deal. "Without many many many conversations this doesn't happen," she says. The ferocity of the debate over taxes is mirrored at a national level, where rows over the budget threaten to bring the US to the brink of default. With budget cuts setting in nationally, New Mexico, long reliant on federal dollars, has felt growing pressure to diversify its economy beyond centrally funded laboratories and military bases. But the race by states to cut taxes has angered critics, who say the poor and middle class will lose out while large multinationals gain. The competition among states has always been going on but now it's a little more visible. It seems that this year, tax reform is the exciting thing to do," says Elizabeth Malm of the Tax Foundation, a conservative Washington think-tank. If they see a neighbouring state trying to lower business taxes, they might try to do it as well. The centrepiece of the New Mexican legislation cuts the corporate income tax rate from 7.6 per cent to 5.9 per cent, phasing it in over five years. The proposal does not go as far as the recent corporate tax cut to 4.9 per cent over time in adjacent Arizona, or plans in Louisiana - which are now on hold - to scrap income tax completely. But in New Mexico, business groups argue that their tax reform will still change the state's fortunes dramatically and for the better. We were totally left out of the competition. Our problem was that we weren't even getting to the dance," says Terri Cole, president of the chamber of commerce of Greater Albuquerque, New Mexico's largest city. Critics argue that cutting state business taxes - though they represent relatively small chunks of state revenues, less than 2 per cent in New Mexico - still leaves a gap that will have to be filled by spending cuts. "Even if they don't translate directly into identifiable cuts, they prevent states from making investments in people and infrastructure that will enhance their economic performance in the long run," says Michael Mazerov, a state budget policy analyst at the left-leaning Center on Budget and Policy Priorities in Washington. And New Mexico has some of the lowest educational standards in the country, coupled with high rates of poverty and income inequality - despite an unemployment rate of 6.9 per cent, which is below the national average. "I think you're going to find a lot of legislators with heartburn about this bill," adds Bill Jordan, senior policy adviser of New Mexico Voices for Children. "It's a pretty regressive shift - the big winners are big corporations and the losers are working families because they have to pick up the tab," he adds. According to a state official, the bill would be revenue neutral over a 15-year period because municipalities over time would pick up the cost. The corporate income tax reduction is only one part of the package - the other main provision being the switch to a so-called "single sales factor" for manufacturers that allows corporate taxes to be levied only on their sales in the state, rather than an average of sales, payroll and property. This perk has gained traction across US states in recent years, including in Oregon, which passed a 30-year guarantee specifically designed for Nike, the sportswear maker, to keep its single sales factor in place. In New Mexico, Intel, which employs more than 3,000 people, lobbied fiercely for the change. Meanwhile, New Mexico tightened tax reporting rules for big-box retailers, but softened the blow for Walmart, including an exemption for those establishing large distribution centres in the state. The entire package was passed as an amendment to a special tax incentive measure for the film industry specifically designed to attract television series productions after the success of Breaking Bad, the story of a teacher-turned-crystal methamphetamine producer filmed almost entirely in Albuquerque. "The message that it sends to Hollywood is that we're very committed, we welcome them," says Ann Lerner of the city's film office, who rattles off the economic benefits of such productions. "Every episode brings in $1m in direct spending," she says as she tours the Dog House, a hot dog shop where several scenes of Breaking Bad were filmed, as well the Candy Lady, a confectioner that supplied fake blue meth to the film crew. Proponents of the tax package say the stakes are so high precisely because the state has struggled for so long to have a dynamic economy. "We have to become more competitive," says Ms Martinez. We have great weather - we have great people. We have a diverse environment and landscape. We just have to make sure they start to look at us as a place to bring their companies. Uncertainty over federal reform While Republican governors - such as Susana Martinez in New Mexico - are in a race to slash corporate taxes at a state level, in Washington the prospects for a sweeping overhaul of federal business taxes remain mired in uncertainty. Across the political spectrum, US lawmakers and the White House agree that America's top corporate tax rate of 35 per cent - the highest in the developed world - puts US companies at a competitive disadvantage in the global economy and discourages inward investment. There is a general consensus to lower the rate, and to pay for the effort so it does not add to America's budget deficits by eliminating or limiting the plethora of corporate tax breaks that riddle the code. Barack Obama has proposed bringing the rate down to 28 per cent generally, and 25 per cent for manufacturers, while Republicans in Congress want to cut the rate to 25 per cent across the board. There is also some common ground on international taxation. The US still uses a worldwide system - which taxes overseas profits when they are repatriated to the US, with few exceptions - as opposed to many of its trading partners that have adopted a territorial system of taxation that does not tax foreign earnings. Many US multinationals see this as another element penalising them in foreign markets. Mr Obama campaigned against a territorial tax system in the run-up to last year's election, on the grounds that it promotes shifting jobs overseas. Republicans support such a change. But the split does not seem insurmountable, with many tax policy analysts saying there should be a way to design a "tough" territorial regime that discourages multinationals from gaming the system. Yet a deal on corporate taxes will nonetheless be difficult. Fierce lobbying efforts are under way by each sector to protect their interests, which could jeopardise an agreement, and Democrats and Republicans are not unified on which tax breaks to preserve and which to scotch. And the whole process of business tax reform is being folded into an even broader overhaul of the US tax code, including the individual side, where divisions are even starker. Some business lobbyists and supporters of corporate tax reform on Capitol Hill hope it could move forward even in the absence of a grand fiscal bargain - that would include tax reform and spending cuts. But for now that seems like the most likely avenue for a deal.