It would be the largest new tax of its kind in a decade, raising $42 million a year for basic county operations and new mental-health services – and costing each household in Bernalillo County roughly $160 a year.
Bernalillo County commissioners on Thursday will consider adopting a quarter-cent increase in the gross receipts tax, after postponing the decision last week after a contentious meeting.
But the debate involves more than just the county’s financial challenges and proposed new services. It also highlights longstanding criticism of the way gross receipts taxes work – and local governments’ reliance on them.
“Raising the rate makes everything that’s bad about gross receipts taxes worse,” said Richard Anklam, president and executive director of the New Mexico Tax Research Institute, a nonprofit and nonpartisan group.
He and other experts describe two basic problems with gross receipts taxes in New Mexico: They hit the poor harder than people of higher incomes and they increase the cost of doing business.
The tax institute hasn’t taken a position on the county proposal, and Anklam said he realizes the county has few options for raising revenue, if it determines an increase is justified.
The proposal going before commissioners this week would boost the tax rate on most goods and services in Albuquerque from 7 percent to 7.25 percent.
The last new city or county tax of that size – a quarter of 1 percent – came in 2004, following voter approval of a tax for Albuquerque police and public safety. City voters also renewed a quarter-cent tax in 2009, first adopted 10 years earlier, dedicated to roads and transportation.
Economists say gross receipts taxes are “regressive,” meaning they are harder on families with lower incomes. That’s because people with more money tend to use it for some expenses that aren’t subject to the gross receipts tax, such as saving for retirement.
“The things that are taxed by gross receipts are a bigger part of, say, a lower-income household’s budget,” said Brian McDonald, an economist and retired director of the Bureau of Business and Economic Research at the University of New Mexico.
The additional $160 a year per household is a rough estimate, based on the projected revenue and a U.S. Census Bureau estimate on the number of local households. It’s difficult to say more precisely how much the tax would cost each family because it depends on how much they’re spending and what they’re buying, among other factors.
On the other hand, McDonald said, “the county doesn’t really have a tax in its arsenal that isn’t regressive. Property taxes are also widely viewed as regressive.”
Experts on New Mexico’s tax structure point to another problem with gross receipts taxes, something known as “pyramiding.”
Unlike a sales tax, which is applied only to the purchase of goods, gross receipts taxes generally apply to both goods and services. That means a business that pays for accounting, legal or other professional services must pay taxes on the purchase, increasing the company’s costs.
Not only are those costs passed on to customers, Anklam said, but the customer also ends up paying gross receipts taxes on the final product or service.
“You pay a lot more tax than the rate you see on the invoice because it’s embedded in the cost infrastructure in our businesses … Everything (people) buy is a little more expensive than it ought to be because of pyramiding,” he said.
Anklam said he realizes governments have bills “we have to pay. That’s the balancing act that our lawmakers have to weigh. … I can’t speak to how badly they need the tax.”
Supporters of the tax say it’s worthwhile. The portion dedicated to mental-health programs, in particular, has drawn supportive testimony at county meetings from recovering addicts, their families and people who work with other men and women struggling with mental illness and addiction.
A task force of city, county and state representatives has recommended creation of a crisis-stabilization center and other measures aimed at reducing violent confrontations between police and people with mental-health or drug problems. Half of the new county revenue could go toward those priorities.
Approval of the tax would require support from three county commissioners. Two commissioners, Maggie Hart Stebbins and Debbie O’Malley, have expressed strong support for imposing the tax to address behavioral-health priorities. A third commissioner, Art De La Cruz, has suggested he would support the tax if certain conditions are met.
The other half of the tax – aimed at helping shore up a projected $40 million to $70 million deficit in next year’s budget – is on shakier ground.
De La Cruz wants to scale it back. Hart Stebbins said last week that she wasn’t inclined to support that part of the tax. She wants opponents of the tax to better explain what can be cut to balance the budget without new taxes, she said.
The county tax doesn’t require voter approval, though the concept of a smaller tax was favored overwhelmingly in an advisory question on last year’s general election ballot.
A nonbinding question asked voters whether they would support a one-eighth of 1 percent tax to fund mental-health programs, and 69 percent said “yes.”
Rates up over time
Criticism of gross receipts taxes, of course, predates this year’s debate. But increasing the rate over the last few decades exacerbates the problem, Anklam and McDonald say.
In 2002, the last year listed in online tax tables, the tax rate in Albuquerque was 5.8125 percent. It’s now 7 percent, potentially going up to 7.25 percent, pending the County Commission decision.
In 2002, the tax rate in Bernalillo County, outside city limits, was 5.375 percent. It’s now 6.0625 percent, potentially climbing to 6.3125 percent.
McDonald said the rate has climbed as the government has narrowed the tax base, exempting things like food and medicine from gross receipts. There are also some services taxed by the state, without the revenue being shared with local governments, he said.
“Rather than raise the rate, in New Mexico, I think we need to look at broadening the base,” McDonald said.
That would require state action. In the meantime, Bernalillo County and other local governments are considering the options they have before them.
And deciding whether a quarter-cent increase is simply too much now rests with the County Commission.