Our intellectual opponents over at Voices for Children have concerns about legislation, which the Rio Grande Foundation has expressed support for, that would enact a “hard reboot” of New Mexico’s tax code. That “reboot” would essentially restore New Mexico’s gross receipts tax to what it was originally intended to be: a low, flat tax upon all items and their inputs with a statewide rate of 2% and local options up to 3%. New Mexico’s corporate and personal income taxes would be eliminated.
“Voices” hates the plan because it might make New Mexico’s tax system more “regressive.” Regressive is a term that means the poor will pay a higher percentage of their incomes in taxes than will the wealthy. Notably, New Mexico’s tax system is already rather regressive. Advocates of “progressive” taxation (meaning that the wealthy pay a higher percentage (not just more taxes) love income taxes because higher rates can be levied at higher income levels. While the US tax code is considered to be the most progressive in the world, I couldn’t find a US state that had a truly progressive code. California with its steeply-progressive personal income tax (topping out at 13.3%) comes close.
Which leads me to the most fundamental point of this discussion. An overly-regressive tax structure can be problematic, but taxes that dampen economic growth are at least as big if not a bigger problem. After all, you can’t redistribute poverty, just wealth. As we’ve already pointed out, taxing income (business formation and work) is damaging to economic growth in ways that taxing sales is not.
New Mexico’s economic woes are well-known. It is worth taking a hard look at how taxes are levied in this state to see if something can be done to spur private-sector economic growth. The gross receipts tax isn’t going away anytime soon because it allows New Mexico to generate revenue from federal activities in our state in ways that a sales tax cannot. Getting rid of the income tax and eliminating loopholes and the problem of high rates from our gross receipts tax seems to be the best available option.
And, on the issue of regressive taxation, perhaps some kind of basic credit could be written into the law to mitigate the effects of regressivity? I’m thinking of something along the lines of the “pre-bate” idea from the FairTax which has been proposed at the Federal level.