N.M. business tax code selects winners, losers

My personal opinion is that New Mexico would be better off eliminating corporate income taxes rather than tweaking them all the time.

Corporate income taxes disrupt the optimum flow of capital by compelling companies to base investment decisions on taxation instead of economic fundamentals. The corporate income tax code is complicated and difficult to enforce. Our state spends time and money trying to mitigate the effects of taxation to encourage economic development. The cost of corporate income taxes usually is absorbed by workers in the form of lower wages, according to Federal Reserve Bank of Kansas City analysts.

Many economists hold this view, but it is by no means a consensus opinion.

Now an important new study shows that business taxes in New Mexico result in an uneven playing field. The way a company is taxed in New Mexico depends very much on the business it is in. Inadvertently, New Mexico chooses winners and losers. Tweaking taxes, the study seems to show, changes who wins, which is not the same as making sure that our tax code welcomes every business that is willing to behave honorably.

States tax corporations for a few reasons. It seems fair. After all, non-corporate persons have to pay income taxes. Corporations consume public services like police and fire protection, so they ought to help pay for them. There are only so many sources of tax revenue, and states go where the money is. New Mexico expects to collect about $310 million in corporate income taxes in the current fiscal year, according to the Legislative Finance Committee.

Meanwhile, policymakers want new companies to bring new jobs into New Mexico and incumbent companies to add jobs. They have discovered that a barrier to attracting companies can be found in our business tax code. New Mexico works to overcome those barriers with tax breaks and other incentives to the tune of about $110 million a year.

At the prompting of a number of public officials, chief among them Albuquerque Mayor Richard J. Berry, the New Mexico Tax Research Institute asked Ernst & Young to identify how our taxes affect our competitiveness among other Western states hoping to attract and grow business.

Absent incentives our effective tax rate is the highest of the nine states E&Y studied.

E&Y found that with incentives New Mexico has a pretty competitive business tax structure if you are in research and development, aerospace or management and technical consulting. We punish most manufacturers with some of the highest taxes in the region.

Richard Anklim of the institute said that our incentives immediately reward companies that pay high wages, so R&D companies, science and tech firms, and very sophisticated manufacturers benefit from credits almost the instant they hire someone. Our gross receipts taxes punish companies that require a lot of consumables, such as electricity, so more traditional manufacturers are better off looking elsewhere to expand.

Berry and other officials were anxious to know what changes in the tax code could make New Mexico more competitive, so E&Y looked at some ways corporate income taxes could be changed, including implementing single sales factor taxation and lowering the corporate income tax rate from 7.6 to 4.9 percent.

A single sales factor has to do with the basis on which corporations are taxed. A state could tax a corporation entirely on income it earns in the state or in all of the states where it does business. It can base taxes on the portion of revenue a company collects in the state, on the assets it owns in the state, on the number of people it employs or any number of other factors. Each approach has its flaws and benefits, depending on what a state wants to accomplish.

Single sales factor assesses taxes on how much of a company’s sales occur in New Mexico. Berry and other officials would very much like new clean, high-value-added manufacturers to set up shop in New Mexico and export their products. Single sales factor essentially forgives taxes on any company that exports, which should appeal to manufacturers serving national and global markets. The many small New Mexico companies with few, if any, out-of-state sales get nothing out of it, so far as I can tell.

E&Y found single sales factor would dramatically lower the effective tax rate on headquarters operations, food products manufacturers and electrical equipment manufacturers. Computer and electronics manufacturers would still be hit hard, and renewable energy equipment makers would see modest improvement, again because of the effect of our gross receipts taxes.

Lowering the corporate tax rate helps computer and electronics makers a lot but does little for other manufacturers.

The study tells me that no one is smart enough to design a tax code that preserves an even playing field, and I don’t think we want state government deciding who the winners should be. Given that corporate income taxes carry so much other baggage, I’d love to see the state surrender to reality and repeal corporate income taxes.