SANTA FE – New Mexico could shave about 3 percentage points off its gross receipts tax rate – maybe more – if it removed all deductions in the tax code and started levying the tax on wages, real estate transactions and food.
That was one hypothetical scenario shared with state lawmakers Tuesday as experts hired by the state walked them through a computer model they’re building to analyze legislative tax proposals.
The experts – employees of the global professional services firm Ernst & Young – didn’t advocate for any particular proposal Tuesday. They simply demonstrated the power of the computer model they expect to turn over to the Legislature and its staff later this month.
State Sen. William Sharer, a Farmington Republican who pushed for the $400,000 study, said he hopes it will give legislators the information they need to make sound policy decisions on a topic that’s drawn intense debate, especially over the past year. Opponents have said they fear the potential unintended consequences of revising the tax code.
“I think this model will certainly give us some confidence going forward,” Sharer said.
The tax study isn’t expected to be completed until late January, after the legislative session begins, although parts of the work will be available to the Legislature later this month.
Andrew Phillips and Caroline Sallee of Ernst & Young shared an update Tuesday with the Legislature’s Revenue Stabilization and Tax Policy Committee. Much of their presentation focused on New Mexico’s gross receipts tax base and how potential changes would affect state revenue.
They are also working on a model that will help analyze potential changes to personal income taxes.
Lawmakers spent nearly three hours poring over the data Tuesday, but it wasn’t clear the discussion moved the political debate forward much.
Democratic legislative leaders have suggested there won’t be enough time in the coming 30-day legislative session to pass a substantial overhaul of the tax code – a priority of Republican Gov. Susana Martinez.
“I’m just hopeful that we can get something meaningful done before I die,” said Rep. Jason Harper, R-Rio Rancho, drawing laughter from his colleagues.
Rep. Bill McCamley, a Las Cruces Democrat and chairman of the House Labor and Economic Development Committee, noted that the study shows that levying the gross receipts tax on food purchases would have a disproportionate impact on households making less than $40,000 – because they spend a higher percentage of their money on food than do higher-income households.
He said he wouldn’t favor adding to the tax burden of poor families, but he acknowledged that other changes to the tax code – to income taxes, for example – could help address his concern.
“I think the tax code here is too complicated,” McCamley said. “I just worry that if we’re not going to address it in a holistic manner, we risk putting the burden more on poor people” or risk reducing government services.
Among the preliminary findings released Tuesday:
• Almost half of all gross receipts in New Mexico – basically the sale of goods and services – is the subject of a tax deduction, meaning it isn’t taxable. Food is in this category, for example.
Many of the deductions are in place to address pyramiding, or the imposition of taxes on each step in a larger transaction, the result of which is an exponential increase in the overall taxes paid. But supporters of overhauling the tax code say much more needs to be done to address pyramiding.
• If New Mexico were to remove every deduction and start levying the gross receipts tax on more goods and services, it could reduce the state share of the tax rate from about 4.4 percent to about 1.43 percent, while generating the same amount of revenue.
But city and county governments also impose gross receipts taxes, so it isn’t clear how high the actual rate would be. In Albuquerque, for example, the rate is about 7.5 percent – added, like a sales tax, to the purchase of most goods and services.
Sharer, who favors a low tax rate across a broad tax base, has been pushing for a 2 percent gross receipts tax, meaning local governments would have to get by with just 0.57 percent to fit under the cap. That might be possible, Sharer said, given that more things would be subject to the tax under a proposal like his.
The scenario evaluated by Ernst & Young would have involved levying gross receipts taxes on a variety of transactions that now get a break, such as food, employee wages and real estate transactions.
Once the company’s work is finished, lawmakers can mix and match their own proposed deductions, exemptions and other changes to evaluate what works.
Sen. Clemente Sanchez, a Grants Democrat and chairman of the Senate Corporations and Transportation Committee, said the study “is a good start for us. Now we can’t claim we don’t have the tool anymore to do something.
“We just need to decide when to do something to fix our tax – I wouldn’t call it a mess – confusion.”