How competitive is New Mexico’s Business Tax Climate?

“Taxes, credits make NM Competitive” screams the headline from today’s Albuquerque Journal. The article by Winthrop Quigley discusses a new report from the New Mexico Tax Research Institute (NMTRI) which found that after accounting for the myriad tax credits and incentives enacted in the Legislature (largely at the behest of Gov. Martinez) New Mexico’s tax burden on businesses is the lowest in the region.

It’s an interesting study that is certainly worth a read. NMTRI does some great work. I can’t really say that I put much credence in Ernst & Young’s work since their findings that New Mexico’s film subsidy program generated $1.50 for each dollar spent, but I’m willing to give them the benefit of the doubt in this case. Nonetheless, it is worth recognizing the acknowledged limitations of this study. As the authors note, “New Mexico’s broad gross receipts tax base when combined with relatively high rates results in more pyramiding of tax than other states’ sales tax structures, increasing the cost of purchasing goods and services in New Mexico relative to others states.” RGF has analyzed tax pyramiding’s negative impact, so I’d label this a fairly significant shortcoming.

The good news of course is that, regardless of whether we are actually the lowest-business-tax state in the Southwest or not, New Mexico does seem to be moving in the right direction under Gov. Martinez. This is good news.

Other studies aren’t so favorable when it comes to business taxes. The Tax Foundation put us at 38th. The Small Business Survival Index puts us at 27th.

Business taxes are notoriously complicated with “sales factors,” gross receipts pyramiding (in New Mexico’s case) and targeted incentives being thrown about in ways that just aren’t as common in other areas of taxation. It would seem that if in fact New Mexico has a reasonably low overall tax burden on businesses that policymakers might want to take the step of reducing inefficiency by replacing many of these incentives and special provisions with low, flat, fair, and simple tax policies.

I’m not saying this will be easy, just that I think this is an area demanding more study and additional reforms. Kudos to NMTRI for taking such a knotty issue on. Hopefully the folks at Tesla see this analysis as justification to build their factory here.