Reforming New Mexico’s harmful gross receipts tax

New Mexico’s gross receipts tax (GRT) is a noose around the neck of our state’s economy. This was the basic point of a recent column written by Rep. Larry Larrañaga (R) and Sen. George Muñoz (D). The column discussed a bill that died in the 2014 legislative session that would have eliminated the gross receipts tax  from the sale of goods and services to the United States Department of Defense related to directed energy or satellites. In Albuquerque, the tax is charged at 7 percent. The rate varies statewide.

The impetus behind the bill is that New Mexico is pretty much unique in charging tax on business inputs (a few other states charge similar taxes at far lower rates). It is also unique in charging taxes on federal contractors and services provided to the federal government. This is because the GRT is charged as a percentage of total receipts, not a percent of sales.

The GRT is a jobs-killer because it increases costs for business by 7 percent or more above competing states, most of which do not have taxes on business inputs and none as high as New Mexico’s in terms of the rate. That is a huge margin for someone who plans to provide business services on a national basis and can locate their business anywhere. No one wants to pay an additional 7 percent on top of what they’re already paying to Washington and Santa Fe and, quite frankly, a business that must charge extra is not going to be as competitive.

Larrañaga and Muñoz are attempted to target the GRT for one group of contractors dealing with the Labs. It would reduce revenues to the State and Bernalillo county by anywhere from $2 to $10 million annually.  The problem, of course, is that anytime you carve out one industry for special favors, you push that burden onto others. That’s why RGF opposed reducing electricity prices for a few favored businesses….ultimately the cost must be picked up elsewhere. Already, entrepreneurs and new businesses must pay 7 percent or more for attorneys, technology services, accountants, and a wide variety of other non-politically-favored services if they are provided by a New Mexico business. Alternatively, if you are looking to set up one of these businesses, you are strongly incentivized NOT to locate your business in New Mexico lest you have to add that tax to your prices.

New Mexico’s gross receipts tax either needs to be dramatically-reformed with the rates lowered and other taxes on productivity like the state income tax eliminated, or, the GRT must be eliminated entirely and the budget gap (totaling millions of dollars) made up through a combination of new revenues (including economic growth) and spending restraint. Read the Rio Grande Foundation’s detailed analysis of the gross receipts tax and its myriad problems here.

 

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6 Replies to “Reforming New Mexico’s harmful gross receipts tax”

  1. Many years ago, I read an article in the Albuquerque Tribune that stated that NM set up its GRT specifically so that it could tax federal transactions here in the state. Because the tax generated so much revenue from federal transactions, the state was able to reduce real estate taxes as a source of revenue (we have some of the lowest real estate taxes in the country). But clearly, we are seeing the law of unintended consequences regarding our GRT. I think our GRT is yet another manifestation of our reliance on the federal government and federal spending in NM. Whether we can wean ourselves from the federal spending breast remains to be seen.

    1. I don’t know the provenance of the GRT, but it is a difficult tax to reform indeed due to the gusher of revenue from Washington’s activities.

  2. We in New Mexico being a young state, 1912, have generally kept things as they are from the time of our “founding fathers” (signers of the 1910 Constitution). Things like our tax system. Meanwhile around us, these older states started revising and updating their older stuff much of it based on the original 13 colonies.

    So GRT is an old system.

    Back years ago Representative Jerry Sandel, from Farmington, known as “Mr. Tax” got the agreement of Speaker Ray Sanchez and Senate Pro Tem Manny Aragon to undertake a Tax Reform project. For 8 or 9 years Sandel worked to reform our overall tax system. His biggest achievement was to get all the major players in a room and ask them to put everything back on the table—all their special interests. New Mexico had 45 tax programs and 54 tax exemptions and deductions in those programs. Exemptions like newspapers being exempt and race horses. All this was put back on the table and reasonable reforms were worked out. So finally in 1995, a complete tax reform package was ready. Libertarian Boy wonder vetoed this package to set a Veto Record. We have never recovered from that blow and our recession was deepen because we didn’t have a NEW tax system.

  3. My father, WHM Sr., worked for the N.M. Legislative Council Service as a bill draftsman, he drafted a bill for future Speaker Walter K. Martinez (for Speaker Ken’s dad) in 1966-8 that created the state’s Severance Tax Fund and the Permanent Fund. It was Representative Martinez’s hope that by the year 2000 we would live in a state that paid no taxes because of the success of these funds. This dream would have been realized except for the total collapse of Grants area uranium and coal mining in the 1980’s and the decline of Copper in the 1970’s and 1990’s.

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