This morning’s Journal business page features the New Mexico Tax Research Institute‘s thoughts about the competitiveness of the state’s business tax code. The TRI is an invaluable, non-partisan, non-profit, super-geeky think tank dedicated to helping policy thinkers and makers create a tax code that collects adequate revenue in the most simple manner possible without distorting the economic behavior of firms and other taxpayers. TRI president Richard Anklam calls our tax code “onerous.”
New Mexico’s business taxes were designed to touch as many things as possible, but touch them gently. We impose gross receipts taxes on as many businesses and transactions as we can, for example, and we tax corporate income. The idea was always that we would tax as much as possible but at low rates. Over time there have been countless exemptions allowed for different kinds of taxes. On top of that, we provide all kinds of incentives to companies that will locate or expand here. We give credits for paying high wages, for hiring high-tech workers, for locating in rural areas. We issue industrial revenue bonds. When Intel objected that it had to pay gross receipts taxes on industrial gases it needed to make chips the Legislature enacted an exemption from gross receipts taxes. New Mexico was able to get Union Pacific to locate a major rail yard at Santa Teresa by exempting locomotive fuel from gross receipts taxes.
About a dozen bills have been introduced in this legislative session to tweak gross receipts taxes further. Gov. Martinez is trying to find a way to reduce gross receipts taxes paid by contractors and manufacturers on the products and services they buy as a way to help them recover from the recession.
That’s what makes our tax code onerous: it operates by exceptions to the rules. Gross receipts taxation works like this unless you’re a manufacturer, then it works like that. Income taxes are these, unless you locate in Harding County or hire a computer engineer. Rule-making by exception makes rules complicated, inconsistent, difficult to enforce and the source of unintended consequences.
Any body of law that requires dozens of exceptions to function is just screaming for reform. Rather than tweak GRT yet again, we’d be better off asking ourselves, as TRI does, how much revenue we need to collect, what is the most fair, most simple way to collect it, and what will distort price signals and markets the least.
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