New Mexico should reinstate the gross-receipts tax on food sold in grocery stores, rebate to the poor the taxes they pay on food and lower the general gross-receipts tax rate.
In 2004 the Legislature removed the gross-receipts tax from groceries and raised the gross-receipts tax rate on everything else sold in municipalities.
These actions were based upon a misunderstanding that was widely shared by legislators and the general public. The effect of this change has been the opposite of that intended.
The expressed rationale for the non-taxable treatment of food was to help the poor by making the gross-receipts tax less regressive.
Since poorer people spend a greater percentage of their budget on food than others do, elimination of the tax was promoted as a way to help them.
However, this analysis overlooked two important facts.
First, food purchased with food stamps – now called “SNAP” – was non-taxable by federal regulation even prior to New Mexico’s legislative action.
Food stamps are used by approximately 25 percent of New Mexico households. They total nearly $700 million in purchasing power and account for a large percentage of the grocery purchases of our poorest citizens and others with lower incomes.
Eliminating the tax on food provided no relief to this portion of their budgets.
On the other hand, major beneficiaries of the removal of the tax on food are customers who shop for higher-end food products at expensive grocery stores and who have few budgetary constraints. Certainly the great majority of this tax relief goes to people with above-average incomes.
Second, New Mexico has a low-income comprehensive tax rebate – “LICTR” – administered through our income tax system. This rebate is designed to offset regressive features in our tax system, including the imposition of gross-receipts tax on necessities.
LICTR results in a negative tax liability for many of our poorer citizens, who get cash back from the state. LICTR is a very efficient way to get tax relief to low-income citizens. It is much more direct than providing widely applicable gross-receipts tax relief or property tax relief.
The Tax Department and many nonprofit groups provide free filing assistance, if needed, to the people claiming the LICTR income-tax rebate. Therefore, the utilization rate of this rebate by those entitled to it is very high.
The Legislature in 2004 passed up a chance to provide significant help to the poorest and other low-income groups by enhancing the LICTR program. LICTR currently provides some help to taxpayers with annual incomes up to $22,000. At lower-income levels, a family of four receives slightly more than $300. LICTR was probably due for adjustment in 2004 and is overdue now. In spite of inflation, the LICTR schedule has remained the same since 1994.
There is also an anomaly in the 2004 legislation eliminating the tax on food – it was limited to groceries sold in grocery stores. To reduce the impact of the legislation on state revenues, tax-free status was denied to groceries sold in stores not eligible to participate in the food-stamp program, such as most convenience stores.
The poor are more likely than upper-income citizens to find traveling to a grocery store inconvenient and, therefore, some of the poor buy some of their groceries at convenience stores.
To offset the reduction in state revenues caused by the elimination of the tax on groceries, the Legislature raised the gross-receipts tax rate on all other products sold in cities.
This increase, of course, applies to all of the purchases made by the poor for which food stamps cannot be used. It also applies to nearly everything bought by anyone else, rich or poor.
The elimination of the tax on grocery store food, which provided only limited benefit to the poorest 25 percent of our households, combined with a tax increase on all other purchases, probably made our tax system more regressive by most measures.
This was not the intent of the 2004 legislation.
New Mexico should reinstate the tax on groceries and use a portion of the revenues to increase the LICTR rebate in an amount which will reimburse the poor – as defined by the Legislature and governor – for at least the amount of the tax they pay on food.
The excess revenue should be used to lower the general gross-receipts tax rate to make this change revenue-neutral.
