Rep. Jason Harper’s massive bill to overhaul the state’s tax structure – which would eliminate more than 100 tax deductions, widen the tax base and lower the tax rate – could inject some much-needed fairness, clarity and predictability into what has been called New Mexico’s “Swiss cheese” system of taxation.
Of particular interest is the Rio Rancho Republican’s effort to reform the state’s gross receipts tax program.
For those who have benefited over the years as lawmakers carved out numerous “holes” in the tax code that exempted them from paying gross receipts taxes, New Mexico’s version of a sales tax on goods and services, Harper’s 347-page House Bill 412 will be a tough sell. Fortunately, the bill appears to be getting the thoughtful consideration it deserves. Over the past few days the House Taxation and Revenue Committee has heard from businesses, health care companies, nonprofit groups, broadcasters and others, many of whom expressed concern about what they viewed as the unintended consequences of removing various exemptions – particularly those regarding food and medicine. More on that in a minute.
First, Harper notes that to lower the overall tax rate, it’s necessary to eliminate as many exemptions as possible, thus spreading the tax burden over a wider base. And, he said, the reforms are designed to be revenue neutral – meaning they produce the same amount of revenue instead of a windfall for the state.
Additionally, HB 412 would greatly simplify a tax system that Terri Cole, president and CEO of the Greater Albuquerque Chamber of Commerce, says is “bewildering” to companies considering moving to the Land of Enchantment.
The plethora of exemptions granted over the years includes nonprofit and government hospitals; health care providers; online retailers; boat and livestock sellers; newspaper sales; even those who make profits off horse racing.
Predictably, many of those who have benefitted from the exemptions are opposing the potential loss of those tax breaks.
In the past, the Journal has opposed measures to get rid of the exemption on newspaper sales, in part, because New Mexico is one of few states that tax newspaper advertising sales. However, the Journal supports this overhaul because of its overall benefits to New Mexicans.
Perhaps the most controversial tax reform measure under consideration is the proposal to repeal the exemption on medicine and most foods, but Harper’s bill would restore the tax while protecting the state’s poorest residents.
It also would remove at least some of the profiteering by cities and counties that have jacked up their tax rates to more than compensate for the food GRT they lost.
It’s a win-win proposition. Here’s why:
When the state Legislature exempted gross receipts taxes on food and medicine in 2005, it created a whole new level of taxation confusion. To help offset anticipated tax losses at the local level, the state began paying cities and counties “hold harmless” funding. In 2013 lawmakers decided to decrease those payments gradually over a 15-year period while also allowing counties to impose – without voter approval – up to three-eights of 1 percent in additional gross receipts taxes with no expiration date.
And the measure was quickly exploited, with several counties imposing rates that raised far more than what they lost. And while those hold harmless payments are phasing out, local governments seem to be scurrying to get more, if not all, of their hold-harmless taxing authority in place in perpetuity.
For consumers, it means you might not be paying tax on milk and eggs, but you are paying much more tax on diapers and shoes.
Harper’s bill eliminates hold harmless payments to local governments. And it protects the low income with a provision that “addresses regressivity of the new sales tax by removing the sales tax on all food purchased by a qualified SNAP (food stamp) program recipients – including food purchased with non-SNAP dollars,” according to the Fiscal Impact Report.
In addition, it:
• Removes tax pyramiding for business-to-business professional services and inputs.
• Levels the playing field for local brick-and-mortar businesses by taxing internet sales transactions.
• Levels the paying field for hospitals by requiring nonprofit and government hospitals to pay GRT like their for-profit colleagues.
• Grounds “tax lightning” by removing the requirement that the assessed value of a property immediately adjust to “current and correct” when a property changes ownership as well as the annual cap on property valuation increases to allow yield control to work effectively.
• Creates just one personal income tax bracket and one corporate bracket at 5 percent.
• Re-brands GRT as “sales tax.”
And it honors the intent of user taxes, distributing:
• Liquor excise tax revenue to state and county DWI treatment and prevention programs (60 percent), drug court programs (10 percent), and to the state as a match for Medicaid expenditures (30 percent).
• Motor vehicle excise tax revenue to the state and local road funds (30 percent each) with the remaining 40 percent to the general fund.
While the Legislature still needs to address the hold harmless taxing authority it gave cities and counties, Harper’s plan simplifies the tax code, lowers the state rate of 5.125 percent based on a formula to somewhere around 2.7 percent and broadens the tax base while no longer picking industry winners and losers via tax policy.
While there’s plenty of opportunity for fine-tuning, it is a move toward good public policy that is fair, easier to understand and gets rid of that “Swiss cheese” nightmare. A lot of work went into those 347 pages. Lawmakers should continue to give HB 412 serious consideration in committees and get it to their respective floors for votes.
This editorial first appeared in the Albuquerque Journal. It was written by members of the editorial board and is unsigned as it represents the opinion of the newspaper rather than the writers.