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Tax rates climb amid debate over revising state code

Copyright © 2021 Albuquerque Journal

SANTA FE – A rise in gross receipts taxes throughout New Mexico – in Democratic and Republican communities – is putting extra pressure on weak points in the state’s tax system, worsening the problem of “pyramiding,” according to testimony before legislators Thursday.

In Albuquerque, for example, the rate climbed by more than 2 percentage points in 19 years, growing from 5.8125% in early 2002 to 7.875% last month.

The increased rates add stress, experts say, on a troublesome part of New Mexico’s tax code – pyramiding, or the way taxes build on each other in business-to-business transactions, such as when a shopkeeper hires an accounting firm to handle payroll.

It’s less of a problem when taxes are low. But the combined rate – including city, county and state portions of the gross receipts tax rate – now reaches 9% in some areas.

“We’ve pretty much reached the absolute top of our capacity,” said Richard Anklam, executive director of the nonpartisan New Mexico Tax Research Institute. “It’s problematic and deserves your attention.”

His comments came in testimony before the legislative Revenue Stabilization and Tax Policy Committee.

 

Over the years, lawmakers have repeatedly tried without much success to address pyramiding – either through tax breaks for certain transactions or by lowering the gross receipts tax rate overall.

But the tax rates generally have climbed. In Farmington, the gross receipts tax rate has climbed from 6.0625% in 2002 to 8.375% last month, in Santa Fe from 6.4375% to 8.4375% and in Rio Rancho from 6.1875% to 7.6875%.

The rates vary by almost 4 percentage points throughout the state, from 5.5% in parts of Lea and Lincoln counties to 9.4375% in Taos Ski Valley.

New Mexico levies a 5.125% gross receipts tax on most goods and services, and some of the revenue is distributed back to local governments. Cities and counties can also levy local taxes on top of the base rate.

Food tax debate

Cities and counties have raised taxes partly in response to changes by the Legislature.

Lawmakers, for example, repealed the gross receipts tax on some food in 2004. To compensate cities and counties for the lost revenue, the state makes payments to local governments and allowed them to raise gross receipts tax rates.

Sen. Ron Griggs, R-Alamogordo, said legislators should take responsibility for their role in shaping the current system, not just blame cities.

“We need to not put it on their backs to change it,” he said. “We did it. We need to suck it up and figure out how to fix that.”

Griggs suggested the solution could involve reimposing gross receipts taxes on food, though perhaps at a lower rate than what’s charged for other goods and services.

Bringing back the food tax has repeatedly failed to move forward in the Legislature. It’s generally considered the largest tax break in New Mexico’s tax code.

Forgoing taxes on the sale of food at grocery stores – and paying local governments to help offset the lost revenue – cost the state about $599.7 million in 2020, according an estimate shared by economists for the Legislative Finance Committee.

It’s a substantial increase from 2019, partly because of a one-time adjustment triggered by a company that said it had overpaid its taxes for several years.

Lawmakers have generally tried to overhaul the tax system in a way that wouldn’t change overall revenue levels, requiring proponents to find a way to make up the lost revenue from reduced rates in one area by increasing taxes elsewhere.

Senate Majority Leader Peter Wirth, D-Santa Fe, proposed changes to a host of taxes last year as part of a plan to reduce the gross receipts tax rate. It didn’t win approval.

Part of the problem, Wirth said, is that it costs the state about $68 million a year to reduce the rate by just one-eighth of a percentage point.

“We put all these pieces in play,” he said, “and you barely move the needle.”

Wirth said lawmakers will have to “think big” to address the gross receipts tax system.

“We’ve got ourselves in a really tough predicament,” he said.

Reliance on sales taxes

Anklam, the tax expert, compared the ongoing debate about overhauling New Mexico’s tax system to Sisyphus pushing the bolder up the hill, only to see it roll down before reaching the top.

But addressing New Mexico’s tax system “is more important than ever because of the rate increases,” Anklam said.

Complicating matters, he said, is that New Mexico relies more heavily on sales taxes – such as the gross receipts tax – than other states. By contrast, he said, New Mexico leans less on property and income taxes than other states.

Anklam noted that the increase in gross receipts tax rates has come as the state has exempted more goods and services – such as food – from taxation.

“In New Mexico, we’ve narrowed our base, and we’ve raised our rates,” Anklam said. “The less you tax, the higher rate you have to tax it at to get the same amount of money.

“That’s been our policy history for the last 15 to 20 years.”


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