It’s time to fix a flawed tax shift

This op-ed ran in The (Farmington) Daily Times on March 1, 2015. 

On January 1, 2005, food bought at New Mexico’s grocery stores was excluded from the gross receipts tax, or GRT. In exchange for the break, the GRT was hiked on all other purchases.

A decade later, it’s clear that the tax shift was a mistake.

With several proposals before the legislature to reinstate the GRT on food, it’s time for an honest examination of how and why the well-meaning exemption failed.

Many of the state’s liberal activists and organizations opposed ending the food tax. In 2003, New Mexico Voices for Children argued that the “very poorest people will not receive the benefits,” because most “use food stamps, which are not subject to gross receipts taxes.” (A staggering 21.5 percent of our citizens participate in the federal program.) In addition, many household essentials such as soap, paper products, and toothpaste remained taxable. Utility and motor-fuels taxes were not touched, either.

Centrist organizations, too, doubted the wisdom of the switch. The Association of Commerce and Industry of New Mexico warned of “administrative and compliance burdens for … retailers and the Taxation and Revenue Department.” And the New Mexico Tax Research Institute predicted that “exempting food from gross receipts tax will narrow (the) base and may lead to higher gross receipts tax rates on other goods and services in the future.”

In 2013, Dick Minzner, a former secretary of the New Mexico Taxation and Revenue Department, and Brian McDonald, a former director of UNM’s Bureau of Business and Economic Research, concluded that the effect of the food-tax exemption “has been the opposite of that intended.” Why? By providing “only limited benefit to the poorest … of our households, combined with a tax increase on all other purchases, (it) probably made our tax system more regressive by most measures.”

Since the GRT reorganization did not include any requirements to cut public expenditures, rates continued to rise. As mentioned, in 2005, the non-GRT rate at the state level rose to 5 percent. Five years later, it jumped to 5.125 percent. Two years ago, local governments were allowed to hike their GRTs, and many did. Others, facing a stagnant economy and soaring healthcare and education costs, soon will.

A regularly-rising GRT is particularly pernicious to economic development. As William F. Fulginiti, executive director of the New Mexico Municipal League, put it, “A higher rate on business-to-business purchases of supplies, raw materials and equipment at every stage of production — known as tax pyramiding — has resulted in exponential tax increases that have made New Mexico uncompetitive.”

The best antipoverty program is expanding employment, and the low-income families proponents of the food-tax exemption seek to boost aren’t aided by an economy that does not provide plentiful, good-paying, jobs. The legislature is considering several bills to cut the state GRT, in exchange for restoration of the food tax. For example, SB274, sponsored by State Sen. John Arthur Smith, D-Deming, would return the state’s GRT to 5 percent, while allowing local government to once again apply their GRTs to food. It’s a small, but important step toward widening the GRT, which is riddled with well over 300 exemptions.

Ultimately, New Mexico must adopt a thorough tax-reform package — one that lowers the overall burden, reduces complexity, and lightens compliance costs for consumers and businesses alike. Until then, measures to broaden the GRT’s base make sense. Taxing food is a good place to start.

D. Dowd Muska (dmuska@riograndefoundation.org) is research director of New Mexico’s Rio Grande Foundation, an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.