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NM’s corporate tax advantage

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Legislation enacted last year to make New Mexico’s business tax climate more competitive did lower the effective tax rate on some businesses, but when combined with credits makes state taxes the lowest in the region for manufacturers, according to a New Mexico Tax Research Institute study.

Changes in corporate income tax rates and new rules aimed at eliminating tax on income earned through sales of goods out of state lowered the effective tax rate on manufacturers 46.9 percent, from a 17.9 percent tax rate in 2011 to a 9.5 percent tax rate.

But that lower rate was higher than the 7 percent average corporate tax rate of eight states in the region. Only Texas and Oklahoma had higher effective tax rates on manufacturers.

When New Mexico’s investment, high-wage and research-and-development tax credits are counted against other states’ credits, New Mexico’s effective tax rate on manufacturers falls to 3.3 percent, the lowest in the region and significantly below the average 6.3 percent effective tax rate in the region.

A similar study performed in 2011 found that New Mexico’s tax rate on businesses before credits was the highest in the region.

The study simulated tax treatment in Arizona, California, Colorado, Nevada, New Mexico, Oklahoma, Oregon, Texas and Utah.

New Mexico businesses that sell services saw a tax increase after tax credits are counted, from 3.4 percent in 2011 to 6.1 percent. That effective rate is still lower than the 7.6 percent average of eight competing states’ in the region, tied with Nevada’s rate and higher only than Oregon’s region-low 2.2 percent rate.

The institute evaluated simulations performed by accounting firm Ernst & Young of eight hypothetical businesses’ tax treatments in 2011 and 2013. New Mexico’s effective tax rate fell from highest to second lowest for a renewable energy equipment manufacturer; from third highest to lowest for a computer and electronics manufacturer; and from highest to third lowest for an electrical equipment manufacturer.

New Mexico lost competitive ground as well. A hypothetical business support services company’s effective tax rate increased from second lowest in the region to third highest.

Tax rates remained little changed or unchanged for a corporate headquarters, a research and development company, an aerospace products and parts manufacturer, and a consulting firm.

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