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State struggles with how to reform gross-receipts tax

Copyright © 2014 Albuquerque Journal

The prototype Air Force Airborne Laser plane makes its maiden flight July 18, 2002, in Kansas. The bulk of the program work was done in Albuquerque at the Air Force Research Lab until much of it moved to California. (Albuquerque Journal File)

The prototype Air Force Airborne Laser plane makes its maiden flight July 18, 2002, in Kansas. The bulk of the program work was done in Albuquerque at the Air Force Research Lab until much of it moved to California. (Albuquerque Journal File)

New Mexico’s gross-receipts tax long has been seen as an inspired solution to a unique fiscal problem: How can a state government pay its bills when there is so little around to tax?

Enacted in 1966, the GRT was New Mexico’s way to indirectly tax federal government activity that has dominated the state’s economy since World War II, since there is no legal way to tax federal activity directly.

“Our tax policy was aimed at federal activity – and quite successfully,” said New Mexico Tax Research Institute President Richard Anklam. “The problem is the world changed, the economy changed, and we haven’t changed. It’s not 1966 anymore.”

Since 1966, the tax rate has increased, the number of transactions subject to GRT has been reduced, the large health-care sector of the state’s economy has been almost completely excluded, the tax has become more regressive, and businesses complain the GRT on services and inputs to production make New Mexico uncompetitive.

Worse yet, local federal government operations, the original target of New Mexico’s GRT, are finding ways to skirt the tax by purchasing research and technology from out of state.

In 1966, New Mexico had an historical aversion to property taxes, few large and successful businesses, and very few wealthy people – for that matter, not that many people of any description.

Taxable entities

What New Mexico did have was national laboratories, military bases and natural resources such as oil, natural gas, copper, coal and potash.

A water truck makes its way around the Santa Rita copper mine near Silver City. (Albuquerque Journal File)

A water truck makes its way around the Santa Rita copper mine near Silver City. (Albuquerque Journal File)

“You can only tax what you have,” Anklam said.

New York has billionaire hedge-fund managers, so it has a high personal income-tax rate. Nevada has casinos, so it taxes gambling and tourists.

Taxing natural resources was an obvious choice for New Mexico, and over time those taxes fed what are now multibillion-dollar funds that spin off millions of dollars every year into the state’s coffers.

But the federal government doesn’t pay taxes to the state for operating its labs and military bases, and the federal government pays no property tax on the 35 percent of the land in New Mexico that it owns.

The state managed to get into Uncle Sam’s pockets not by taxing Uncle Sam, but by taxing the businesses that sell to Uncle Sam and to everyone else.

Thus, the computer store where consumers, businesses and Air Force procurement officials purchase monitors pays a tax on the value of all of those transactions (the gross receipts). The store either eats the cost of the tax, passes it on to the consumer, or builds it into the price charged to the Air Force.

Any way you slice it, the state gets its GRT.

Worked for awhile

The system worked well at a time when researchers and laboratories had few options but to stay in New Mexico if they were to service the Energy and Defense department installations around the state.

Those days are gone. Thanks to the Internet and other technologies, researchers and engineers can serve New Mexico installations from almost anywhere.

Government contracting officials know this, “and everything is more mobile than it used to be,” Anklam said. “That’s a scary problem.”

Boeing served the Air Force Research Lab in Albuquerque from offices in Albuquerque until 2004, when it moved its Airborne Laser Program Integration and Test operation and 230 jobs to California, though it still served the Air Force in Albuquerque.

Over the next six years, Boeing spent $668 million in California that it would have spent in New Mexico, according to a Legislative Finance Committee analysis. The move reduced Boeing’s tax bite, and New Mexico’s general fund, by about $47 million.

State Rep. Larry Larañaga, R-Albuquerque, introduced legislation this year to exempt some Air Force procurements from GRT, but his bill did not pass.

Other bills exempting some business activities from GRT did pass in the latest session. One bill removes GRT on parts and maintenance services on aircraft. Another provides an exemption to dialysis facilities, and another exempts the sale of infusion-therapy services and the sale or lease of durable medical equipment.

‘We’ve made a mess’

“Over the last 10 to 15 years, we’ve made a mess of the gross-receipts tax,” said Brian McDonald, an economist and former director of the University of New Mexico Bureau of Business and Economic Research. “From an economist’s point of view, we’d like to have a broad GRT base so the rate is low. Instead we’ve significantly shrunk what is subject to tax, but to keep revenue up we raised the rates.”

In 1990, the maximum GRT rate was 6 percent, which included the state GRT of 5 percent plus an additional maximum of 1 percent that local governments could elect to impose.

Today, the state GRT is 5.125 percent. Albuquerque’s combined state and local rate is 7 percent. The GRT in Taos Ski Valley is 8.6875 percent.

“The rate is what influences people’s (purchasing) decisions,” McDonald said. “That makes a tax inefficient. You would like to have a tax that doesn’t influence economic behavior. The higher the rate, the more likely people are to change behavior. They try to avoid the tax, legally and illegally, or they favor consumption of things that aren’t taxed.”

A big reason the base has shrunk is that “the business community has been successful over the last several years getting things out of the tax base, business-input purchases basically,” McDonald said.

The state has eliminated taxes on some manufacturers’ purchases of electricity, fuels, water, gases and chemicals, for example, the sorts of things a company like Intel purchases.

The tax on all of those business inputs used to become part of the final price of the products a manufacturer sells, a phenomenon known as pyramiding. Legislators were told those extra costs make it difficult for New Mexico businesses to compete against firms located out of state.

Pyramiding all over

It isn’t just big manufacturers that face pyramiding, either. An engineering firm that needs accounting, bookkeeping and legal help pays GRT on those services, then has to bill more for its own services to recover the cost.

The business exemptions and the rising rates have combined to make the GRT more regressive, meaning it falls harder on lower-income people. People with less income tend to spend more of their income than do wealthier people, so a greater portion of their income goes to the GRT.

McDonald said progressive income taxes used to offset the regressivity of the GRT, but tax cuts implemented during the Bill Richardson administration made the income tax less progressive.

Today, the top marginal rate is 4.9 percent for a couple filing jointly. It kicks in when their income reaches $24,000. The top rate was once 8.2 percent, and it kicked in when the couple’s income hit $96,000, McDonald said.

The tax cut reduced general fund revenue about $400 million five years after it was implemented and has made it more difficult for the Legislature to fund schools and early childhood programs at the levels it wants, he said.

One can argue that there is a good policy reason for each GRT exemption, and individually each one usually doesn’t amount to that much money, making the exemptions easier to swallow, said Dick Minzner, an attorney and lobbyist who served both as a state legislator and as secretary of Taxation and Revenue.

The food exemption

The biggest – the exemption of retail food sales from GRT – took $227.3 million out of the general fund in 2012. The aircraft parts and maintenance exemption is expected to cost the general fund $570,000 a year.

“Every one of these deductions has a political constituency,” Minzner said. “That’s how they got there in the first place. Getting a deduction taken out is not easy at all, and it may not be a good idea to do it.”

Reducing the rate of gross-receipts taxation without broadening the tax base would cost the state general fund a lot of money, he said, so another revenue source would have to be found.

Eliminating the tax entirely and replacing it with some other form of taxation is almost inconceivable politically.

“The reason we have always looked to the GRT when the state is trying to raise money is it’s the one with the least political blow-back,” Minzner said.

“It’s hard to make a major tax reform because if it’s revenue neutral, the screams of the losers are just going to be louder than the cheers of the winners,” he said. “If it’s not revenue neutral, then it’s a tax increase, and that’s unacceptable in a lot of quarters, or it’s a tax cut, in which case it’s a question of where you’re going to get the money to replace the losses.”