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Tax reform promoted as business panacea

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Business organizations are chanting a new mantra — single sales factor, single sales factor — as they start to line up behind an expected push in the state Legislature to change New Mexico’s corporate income tax code.

They expect the single sales factor (which would allow corporations to base their income taxes entirely on their sales within the state’s borders) and a sharp reduction in corporate income tax rates will put New Mexico in the running for manufacturers and other businesses looking for a place to expand or move.

State Economic Development Secretary Jon Barela and Albuquerque Mayor Richard J. Berry both say that when site selection consultants look at the Western states with which New Mexico competes to land the big companies that can hire a lot of people, two things jump out. Our corporate income tax rate is higher than any competing state but California, and we don’t allow single sales factor. For certain of their clients, these are deal killers. The consultants don’t even put New Mexico on the list as a possibility.

Barela acknowledges New Mexico’s gross receipts tax system needs reforming and that our tax incentives aimed at economic development don’t necessarily work. Of all the things that might be done, these income tax changes can be done, given the mood in the Legislature, he said. It’s a place to begin.

Whether these tax code changes will bring any real jobs to New Mexico is anybody’s guess. Barela says thousands of jobs will be saved or created over the next two years.

Gerry Bradley, an official with the New Mexico Voices for Children and formerly an economist with the state, argues there is no evidence the single sales factor produces jobs. He believes the revenue lost could be put to better use on other things. Businesses benefit from roads, educated workers, flood control and public safety departments. They should all pay for them, he said.

Retailers would get no benefit but oil drillers and copper miners would since all of their production is sold out of state, he said.

There is also the question of what sort of economic development is right for New Mexico. Taxing companies on the basis of what they sell in the state is supposed to attract manufacturers. If there is an industrial sector that works diligently to avoid hiring people and to get rid of them at the least sign of trouble, it’s manufacturing. If we’re going to revise our tax code, do we want to revise it with that sector as our target?

Tourism is a clean industry that employs a lot of people and where New Mexico has some real advantages, not all of them obvious.

The University of New Mexico is home to one of the most important cancer treatment and research centers in the country. With a relatively small investment, someone could build a luxury hotel next to it, fully equipped to service Saudi princes and Chinese moguls, market the living daylights out of the care they’ll receive, and transform UNM’s Health Sciences Center into another Cleveland Clinic over time. Single sales factor would penalize such an operation.

The theory is that with the changes New Mexico’s business climate will improve, new businesses will locate and expand here, those businesses will hire, and tax collections will go up. The question is, will the tax changes create the improved business climate that will bring the jobs?

A Site Selection magazine survey on what mattered most to people who decide where to locate companies’ operations found that state and local taxation topped the list. But they also want transportation and utility infrastructure, a quality workforce, a decent legal and regulatory climate, affordable land and construction, and state and local governments that have sound economic development strategies.

New Mexico does well in several of those categories, but stories abound of relocations scuttled when executives’ families started looking at the quality of our public schools. One company’s local chief told me some years ago when Albuquerque was regularly featured on the “Cops” TV show that some employees refused to come to New Mexico out of fear.

Some companies that recently located large operations here say they appreciated the incentives they got to offset the state tax burden, but what they really liked was the workforce and the eagerness of local governments and businesses to have them here. They got here because the locals sold their tails off to win them.

Berry says the sale would be easier if he could offer a better tax rate and a single sales factor.

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