Over the weekend in an opinion piece in the Albuquerque Journal, Lucky Varela, after a few platitudes about Sen. Bill Sharer’s plan to completely revamp New Mexico’s broken tax system, attempted to “strangle” SB 368/HB369 in the proverbial crib. The point of SB 368 is to return New Mexico’s tax system which is based on a gross receipts tax, to something that has low rates (nothing above 3%), fair policies (all-encompassing), and simple. No more breaks for special interests or one, politically-powerful group with the money to send lobbyists to Santa Fe to get their break.
Varela attacks the plan for being “regressive.” Let’s be clear, a “regressive” tax is not imposed on low income people at a higher rate. It simply means that it takes a greater percent of one’s income at lower income levels. Regressive doesn’t automatically mean “unfair” and New Mexico’s tax code is already regressive. Varela never addresses the issue of whether Sharer’s plan would be better or less-regressive than it is currently. After all, there are a lot of tax incentives and deductions currently in the code that are targeted at higher-income taxpayers as a means of spurring economic growth and overcoming our business-unfriendly tax code.
First, let’s address the quality issue. There is a simple principle in taxation that you tax more of what you want and tax less of what you don’t want. Sharer’s bill would end the taxation of personal income as a separate tax and would fold that into the GRT at the same rate as everything else. Reducing taxes on income would increase productive activity. Also, under current law, New Mexico’s GRT creates a system of double-taxation. Contractors (lawyers, accountants, and more) are taxed by the GRT at rates of 7% or more and then that income is taxed again at up to 4.9%.
Interestingly, New Mexico’s GRT in its current form is applied at relatively high rates. We have the 16th-highest combined state and local burden on sales/GRT and yet our state (as noted in the report) taxes a lot of goods and services that are left untaxed in other states. This is the worst of both worlds.
Lastly, by increasing reliance on gross receipts taxes charged at low rates, New Mexico would actually be increasing the stability of its revenue stream. Income taxes are a volatile form of taxation. When times are good, revenues rise dramatically. When times are bad, they go way down. A low, flat, and fair GRT charged at low rates will generate a relatively reasonable stream of revenues.
New Mexico’s economy is quite poor because we do nothing particularly well when it comes to economic policies. Our taxes on wealth/property are low, but our taxes on business formation and entreprenurial activity are high (income/GRT). We have a poor education system, a poor legal climate, and too many restrictive regulations. SB 368 would make New Mexico’s tax code far more attractive to economic activity and business formation while generating the revenue needed to carry out the functions of government.
Ultimately, the poor in New Mexico will benefit from a stronger economy, more job creation, and higher wages under Sharer’s plan. They certainly haven’t been well-served by our current mess of a tax code.
There are two potential issues: One is that, as New Mexico’s economy generates far more tax revenue under Sharer’s proposal, how do we restrict the temptation to grow government programs even faster? The second issue is how do we keep rates low and avoid special interests getting their own carve-outs put back into the law and thus increasing rates again (after all, NM’s GRT used to be far closer to what Sharer is proposing).