ALBUQUERQUE, N.M. — The head of the state House of Representatives tax-writing committee thinks this may be the year the Legislature makes a serious effort to fix New Mexico’s badly broken gross receipts tax.
“The vast majority of legislators understand the problem,” said Rep. Jason Harper, a Republican from Rio Rancho who is chairman of the Ways and Means Committee. “Now we’re in that tricky middle stage of finding the right balance.”
Albuquerque Democrat Javier Martinez, a committee member, agrees, saying, “There’s across-the-board agreement that the system is broken and in need of reform. The question is, how do we reform it so that the burden doesn’t disproportionately fall on working-class New Mexicans?”
In an interview at the New Mexico Tax Research Institute’s annual conference, Harper said the GRT has become “an unholy hybrid of a gross receipts tax and a sales tax.”
Unlike a sales tax state, New Mexico taxes a large range of transactions, including services. But like a sales tax state, New Mexico has high tax rates.
New Mexico’s gross receipts tax was designed as a way to tax federal government activity without running afoul of rules that bar the feds from paying taxes to the state. Instead of trying to tax Uncle Sam when he bought services or goods from New Mexico vendors, the state taxes the vendors when they sell pretty much anything to anyone. The vendors build the tax into the price of the goods and services they sell to Sandia and Los Alamos labs. New Mexicans have become accustomed to seeing the tax added to everything they buy.
A sales tax is typically applied only to the final transaction, and it is paid by the consumer. Since fewer things are taxed, rates generally are higher.
In theory, if nearly every transaction is taxed, tax rates should stay low. Even though an architectural firm, for example, has to pay GRT to the lawyers or surveyors it hires for a client’s project, the accumulation of those transaction taxes (a phenomenon known as pyramiding) when added to the architect’s final bill should be low enough that the client won’t mind.
In practice, Harper said, whether a business has to pay the tax depends a great deal on how good a lobbyist the business can afford to hire. “If you have a friend in Santa Fe, you don’t have to pay taxes,” he said. The Legislature has enacted dozens of exemptions to the tax. Because state spending increases every year, every exemption a lobbyist has secured for a client requires the tax rate on everything else to increase.
Harper would return New Mexico to a time when GRT applied to just about every transaction and keep the state GRT rate at 2 percent. The current state rate is 5.125 percent, and local and county governments can add gross receipts taxes on top of the state tax. The rate is 7.1875 percent in Albuquerque today.
A reduction in the state’s rate is no guarantee local and county governments will cut their rates as well.
Harper’s plan would mean tax exemptions on business inputs would largely disappear. Harper would tax some currently exempt transactions involving nonprofit organizations. The paper a church buys for its copying machine, for example, would lose its exemption. He would resume taxing sales of groceries and medical care. Companies like BNSF, the railroad operator, that located in New Mexico because of promised GRT exemptions on fuel purchases could be given short-term income tax breaks to compensate.
Harper’s hope is that winners in the new approach would win by a lot and losers would lose by a little.
He whimsically calls his proposal the Lobbyist Full Employment Act. Businesses that fought for exemptions on inputs to production – for example, Intel, which got an exemption on industrial gases it needs to make computer chips – will argue the reimposed GRT will make the company less competitive. Nonprofits will fight to keep their exemptions. Republicans will argue GRT imposes too high a cost on state businesses, and Democrats will say GRT on groceries will punish the working class, Harper said. “There will be compromise.”
One approach, for example, is that low-income taxpayers could have that tax rebated through low-income tax credits.
Martinez believes there is more wrong with our tax code than the GRT. “I would take a serious look at a progressive (income) tax code to ensure fairness for all New Mexican income earners,” he said. “Furthermore, we’ve cut corporate tax rates consistently over the last several years in the name of economic development with unknown results, at best.”
Harper may be more in tune with Martinez’s views than one might expect of a conservative Republican and a liberal Democrat.
Harper agrees it’s difficult to tell whether a tax incentive is working, so he wants every proposed incentive package to come to his committee with an economic impact report and a sunset clause that will let the incentive die automatically. If the incentive is working, the Legislature can renew it.
Every tax incentive requires one taxpayer or group of taxpayers to subsidize another, he said. The best tax structure provides a level playing field for everyone.
“Taxes should not be used for social engineering,” Harper said. “That amounts to picking winners and losers. Why politicians think they’re better at it than the market I’ll never know.”
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