Changing the basis corporations use to calculate income taxes produces the biggest cut of four widely debated approaches to lowering business taxes in New Mexico, according to a new study from Ernst & Young, released to the Journal on Monday.
New Mexico’s effective tax rate when including tax incentives averages 6 percent over all industries but would be lowered to 2 percent if corporations could calculate their income taxes based on the amount of their sales that occur in the state, an approach known as single sales factor.
Exempting consumables like electricity and industrial gases from gross receipts taxation would lower the effective tax rate to 3.7 percent. Lowering the corporate income tax rate from 7.6 percent to 4.9 percent would reduce the effective tax rate to 4.3 percent.
Single sales factor benefits companies that sell goods out of state. Opponents of the approach argue that it punishes local companies and small businesses that don’t have out-of-state markets and that it relieves the wealthiest corporations of their obligation to support the state. Proponents say it will help attract the kind of jobs New Mexico needs.
The study is a follow-up to a report in which Ernst & Young said New Mexico had the highest effective business tax rate in the country before accounting for incentives. Gov. Susana Martinez has argued that the finding justified new tax exemptions for builders and manufacturers and a lower corporate tax rate for all.
A coalition of state, local and county governments, nonprofit organizations and companies funded the study to help legislators evaluate the effect of the dozens tax proposals being considered by the state Legislature.
The new study found that New Mexico incentives reduce the overall state and local tax burden by an average of more than 62 percent. New Mexico’s effective tax rate is tied with Nevada’s and is higher than only Utah’s and Oregon’s among nine Western states E&Y studied.
However, the help incentives provide depends very much on the industry in which a business participates.
E&Y found that with incentives, the state offers the lowest rates of the nine Western states to three industries: research and development; aerospace products and parts manufacturing; and management, scientific and technical consulting services. Business support services is taxed eighth lowest.
However, even after incentives, New Mexico’s tax burden is highest for companies’ headquarters operations; renewable energy equipment manufacturing; food products manufacturing; and electrical equipment manufacturing.
The single sales factor would make New Mexico’s effective tax rate among the lowest of the nine states studied for headquarters operations, renewable energy companies and computer and electronics manufacturers.
Exempting consumables from gross receipts taxes would give New Mexico the eighth lowest effective tax rate for renewable energy and computer and electronics manufacturers.