There Are 2 Sides to the Coin of Business Tax Changes

The state’s major business groups, Albuquerque’s mayor and the governor are backing a bill that effectively would eliminate state income tax on companies like Intel, Conoco and Hewlett-Packard, an approach known as single weighted sales factor. They also want to lower the corporate income tax from a top rate of 7.6 percent to a flat rate of 4.9 percent.

They say the changes should help bring new businesses to New Mexico and get companies already based here to expand.

They are asking a great deal of the tax code. Making New Mexico taxation competitive with other states is one thing. Making New Mexico right for the businesses we’d like to see here is quite another.

There is a good case to be made for both the lower rate and for single weighted sales factor, which lets companies base their income taxes entirely on how much they sell in New Mexico. Intel et al sell little or nothing in New Mexico.

However, two clichés should leap to mind every time governments contemplate big changes in tax policy. The first is: Buyer beware. The second is: Be careful what you wish for, because you might get it.

Single weighted sales factor has been around for a long time, some neighboring states have adopted it, and it has been proposed in Santa Fe off and on for years.

The idea gained momentum in 2010 after a team of businesspeople, economic development experts and city officials tried to get First Solar to locate a new photovoltaic panel plant in Albuquerque. Even as First Solar met with the Albuquerque team, the company was pressuring the Arizona Legislature to lower corporate tax rates and adopt single weighted sales factor, which it did in early 2011.

First Solar announced it was expanding in Arizona, where it has its headquarters. A few months later, it announced that market conditions were forcing it to lay off 2,000 people.

Buyer beware.

Intel, which supports single weighted sales factor, over the years has reduced its workforce in Sandoval County through productivity improvements, though it still employs 3,500 people here, not counting contractors. Intel recently announced that it could not find enough engineering talent locally.

The company is always worried about getting adequate water for its plant. None of these issues disappears with a different tax code.

Intel’s market is changing fast as people buy fewer traditional computers and more smartphones and tablets. Single weighted sales factor taxation might help Intel decide to retool its plant here to supply its new markets. It will depend if, all things considered, Intel will be better off doing it here or at its plants in Arizona, Oregon (both of which have single weighted sales factor) or overseas.

From Intel’s perspective, the question would be, is the tax saving sufficient to justify the investment, or should the business go to another Intel plant? From New Mexico’s perspective, the question would be, would the jobs and economic activity generated (estimated to be about $1 billion a year today) justify the cost of eliminating Intel’s state corporate income tax?

Beverlee McClure, president of the Association of Commerce and Industry, was quite candid about single sales factor when she addressed Economic Forum a few weeks ago. Though ACI supports it, she said we simply don’t know if businesses will respond to corporate tax changes by expanding and hiring and locating in New Mexico, and if they do, whether the hiring and expansion would be worth the cost.

Indeed, our business tax code is packed with incentives designed to bring businesses to New Mexico. Recent studies required by the Legislature say that we don’t even know what some of these incentives cost, let alone what value they bring to us.

The tax code is home base for unintended consequences. Some of the state’s budget experts have complained that last year’s attempt to reduce what is known as pyramiding, or taxing the same transaction multiple times, on manufacturers and builders has cost twice as much as expected without improving the state’s jobs picture. New Mexico’s cuts in personal income tax rates under Gov. Bill Richardson did not produce the economic surge some people expected.

Free-market economists with the George Mason University Mercatus Center found that the Bush-era tax cuts were so badly designed they could not help but fail to stimulate economic growth.

In all cases, lawmakers are stuck trying to pay the government’s bills with less revenue and only a hope that one day the economic boost they expected from tax policy will occur.

The last estimate I heard is that single weighted sales factor would reduce state revenue by about $60 million, perhaps worth it if new jobs arrive as a result, expensive if they don’t.

Be careful what you wish for, because you might get it.

The best argument for single weighted sales factor is also found in the land of unintended consequences. Our current approach bases a company’s income taxes on its sales in New Mexico, its in-state payroll and the value of its assets here. That is to say, a company that chooses to hire more people or add a new production line to its factory here is rewarded with an income tax increase.

Oops.

UpFront is a daily front-page news and opinion column. Comment directly to Winthrop Quigley at 505-823-3896 or wquigley@abqjournal.com. Go to www.abqjournal.com/letters/new to submit a letter to the editor.
— This article appeared on page A1 of the Albuquerque Journal