New Mexico’s tax on Social Security income yields approximately $85 million annually, which is almost entirely paid by upper- and middle-income taxpayers, primarily the former. Arguments for repeal of this tax based on purported concern for lower-income senior citizens are misplaced.
Because of existing provisions favoring Social Security recipients with lower incomes, about 90% of this tax is paid by taxpayers with incomes exceeding $50,000, a majority of which is paid by taxpayers with incomes exceeding $100,000. In fact, taxpayers reporting incomes of less than $32,000 on a joint return pay no tax on Social Security income. Importantly, in computing whether the $32,000 threshold is reached, only one-half of the Social Security income itself is counted. This means that a couple filing a joint return with only Social Security benefits pays no tax unless those benefits exceed $64,000. A couple with $10,000 of other income pays no tax on Social Security unless their benefits exceed $44,000. For a single filer, the stated threshold for taxation of social security is $25,000, but since only one-half of the Social Security income is counted, a taxpayer with only Social Security income pays no tax unless the benefits exceed $50,000.
Even when the threshold for taxation is reached, only 50% of the Social Security income is taxed. At higher incomes this percentage increases to 85%. These provisions, graduating the percentage of income taxed based on taxpayers’ income level, within an income tax with rates also graduated based on income, are among the most progressive provisions in our tax code. Of course, the principal beneficiaries of exempting Social Security income would be recipients in high tax brackets, 85% of whose benefits are currently taxable. Exempting Social Security income from taxation would make our tax system more regressive. It might also foreclose more meritorious tax cuts or cause underfunding of significant programs.
There are good reasons for concern about lower-income senior citizens and lowerincome taxpayers generally, but this proposal would have little or no effect on them. Assistance targeted specifically through the low-income comprehensive tax rebate or the working families tax credit would actually benefit them. Alternatively, the reductions of some business taxes or fees might encourage financial recovery with economic and employment growth. Small businesses have suffered during the pandemic, while Social Security recipients have received their payments consistently.
Further, the Legislature is seeking voter approval of an increase in distributions from the state permanent fund, starting around $212 million per year: $127 million for early childhood education and $85 million for primary and secondary education. The Legislature apparently has concluded the state has insufficient revenues to fund these programs adequately. It would seem anomalous for the same Legislature at the same time to choose to reduce state revenue by $85 million.
Many states do not tax Social Security income, but comparisons among states are of limited value. New Mexico has fewer large corporations and fewer high-income taxpayers than other states. We also have fewer privately-funded educational institutions and more lowincome families. In addition, New Mexico has chosen to keep its property taxes comparatively low. In many states, but not New Mexico, property taxes are a principal source of funding for public education. Therefore, it is not surprising that New Mexico imposes some taxes that other states do not.