As sales tax drops in NM, hard choices await - Albuquerque Journal

As sales tax drops in NM, hard choices await

New Mexico’s gross receipts tax — applied to the sale of both services and goods — has been a focus of debate for years. The state’s base rate is set to be cut by 0.25 percentage points over the next two years. (Eddie Moore/Albuquerque Journal)

Copyright © 2022 Albuquerque Journal

SANTA FE – The state of New Mexico cut its gross receipts tax last week by one-eighth of 1 percentage point – the first reduction of its kind in more than 40 years.

Another decrease is planned next summer.

Whittling down the state’s gross receipts tax even more, experts said Tuesday, could push New Mexico toward the twin policy goals of making the state’s tax system more business-friendly and less burdensome for low-income families.

But getting there won’t be easy.

Generating less revenue from gross receipts taxes would – absent other changes – make New Mexico even more dependent on income from the oil and gas industry, according to testimony at the Roundhouse on Tuesday.

And the traditional strategy of hunting for tax breaks that can be eliminated is fraught with politically difficult trade-offs.

Lawmakers confronted these realities Tuesday in a day of presentations on New Mexico’s complex tax system – a key component of which is a tax on the sale of goods and services, or gross receipts.

The rates have shot up over the years as New Mexico narrowed the tax base by creating a tax break for the sale of some food at grocery stores and granted extra taxing authority to local governments.

The rate exceeds 8% in some communities, such as Santa Fe, Belen and Las Cruces. In Albuquerque, it’s 7.75%.

“It really became a hard number to swallow as someone doing business in New Mexico,” Democratic Sen. George Muñoz of Gallup said.

A tax package approved by lawmakers and signed by Gov. Michelle Lujan Grisham this year is paring back the rate one-quarter of 1 percent, or enough to save a family 25 cents on a $100 purchase.

Half the reduction went into effect last week, and the other half is scheduled next summer.

The state portion of the gross receipts tax, for example, fell from 5.125% to a flat 5% last week. A similar cut of 0.125% is scheduled for next summer.

Each change is expected to cost the state about $94 million in revenue.

They are the first reductions in the statewide rates since 1981, though a 2004 law repealed the gross receipts tax on food.

The food tax deduction – and related payments to local governments to help them afford the loss in revenue – cost New Mexico about $442 million in the most recent fiscal year with data available.

That’s money some lawmakers say could be put to better use by lowering the rate overall.

Lawmakers have repeatedly debated which tax breaks to eliminate as part of strategy to reduce tax rate.

But Stephanie Schardin Clarke, the state’s taxation and revenue secretary, noted that many of the most costly tax breaks center on food, health care, low-income families and economic development.

“It’s hard to find anything on this list that doesn’t have a policy goal that is defensible,” she said.

Rep. Antonio “Moe” Maestas, D-Albuquerque, put it this way: Unwise as it may have been to exempt some food from the gross receipts tax, it’s been impossible to build support for taxing it again.

Lawmakers can learn from the mistake, he said, by ensuring future tax changes are narrowly tailored enough to accomplish their goal.

“I think we’ve learned we can do more targeted tax policy,” he said.

The gross receipts tax and similar sales taxes make up about 34% of the revenue flowing into the state’s general fund, larger than any other source, lawmakers were told Tuesday.

But the gross receipt tax is also responsible for holding back New Mexico’s business-climate ranking, according to Tuesday’s presentation.

The Tax Foundation, a Washington, D.C.-based think tank, ranks New Mexico 28th among states in its Business Tax Climate Index, or roughly middle of the pack.

New Mexico is among the best for property and unemployment insurance taxes.

The state’s lowest ranking is for sales taxes, at No. 41.

Ismael Torres, chief economist for the Legislative Finance Committee, said the complexity of the gross receipts tax system, the high tax rate and the taxation on business-to-business transactions contribute to the poor evaluation.

“The real anchor for New Mexico’s taxes tends to be the gross receipts tax,” Torres said.

He added that the gross receipts tax is also regressive, hitting lower income families harder than others because they spend a higher share of their income on consumption.

On the other hand, Torres said, a reduction in gross receipts tax revenue could make the state even more reliant on its direct taxation of oil and gas production, a particularly volatile revenue source.

How much appetite New Mexico policymakers will have to take on overhauling the tax system isn’t clear.

Voters this year are set to decide all 70 seats in the state House and the race for governor.

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