Tax Reform and the Special Session, Part II

HB 412 doesn’t suffer from lack of ambition.

We explored several facets of the 333-page bill yesterday. Today, as legislators make their way to Santa Fe for the special session, Errors of Enchantment examines the way the tax-reform package favored by the governor substantially eliminates deductions, exemptions, and credits that are applied to the gross receipts tax.

Statutorily, the GRT is imposed on “the total amount of money or the value of other consideration received from selling property in New Mexico, from leasing or licensing property employed in New Mexico, from granting a right to use a franchise employed in New Mexico, from selling services performed outside New Mexico, the product of which is initially used in New Mexico, or from performing services in New Mexico.” But over time, an increasing number of sales have been able to escape the levy’s bite — carve-outs have been written into tax law for what politicians deem to be “public” purposes.

Reform of the GRT’s metastasizing deductions, exemptions, and credits has been a goal of all sides in the state’s tax community for some time. There’s general agreement that a broader base and a lower rate promote both stability in revenue-collection and simplicity in compliance. (Corruption, too, is lessened when elected officials don’t pick winners and losers in the marketplace.) So HB 412, which would convert the GRT into a “sales tax,” slashes away at perks that politically powerful customers/vendors have enjoyed for decades. Here’s a sampling of currently untaxed (or partially taxed) transactions that would be subject to the levy if the legislation were signed into law:

* “selling fuel, oxidizer or a substance that combines fuel and oxidizer to propel space vehicles or to operate space vehicle launchers”

* “the sale of fuel specially prepared and sold for use in turboprop or jet-type engines”

* “hosting world wide web sites”

* “selling wind generation equipment or solar generation equipment to a government for the purpose of installing a wind or solar electric generation facility”

* “selling newspapers, except from selling advertising space”

* “producing or staging a professional boxing, wrestling or martial arts contest”

* “the sale of textbooks and other materials that are required for courses at a public post-secondary educational institution if the sale is by a bookstore located on the campus of the institution and operated pursuant to a contractual agreement with that institution and the sale is to a student enrolled at the institution who displays a valid student identification card”

Check out the Legislative Finance Committee’s analysis of HB 412 for the full list. But if anything, the legislation’s pruning doesn’t go far enough. The exemption for sales of groceries, not a sound policy change when adopted in 2005, would remain. (The value of the exemption is nearly $240 million.) And many deductions/exemptions to special industries and activities would stick around, such as:

* “race purses at … horse racetracks subject to the jurisdiction of the state racing commission”

* “the sale or lease of real property and from the lease of a manufactured home”

* “the sale by a qualified contractor of qualified research and development services and qualified directed energy and satellite-related inputs … when sold pursuant to a contract with the [Pentagon]”

Despite its oversights, HB 412’s targeting of deductions, exemptions, and credits represents a large step toward uniformity and distortion-reduction in the Land of Enchantment’s tax architecture. That’s good news, and perhaps a model for greater simplification to come.

Tomorrow we’ll look at the way HB 412 seeks to apply the GRT/sales tax to transactions conducted over the Internet — and why the proposed provision is unwise and probably unconstitutional.