Tax study almost finished, but inconclusive

A $400,000 study of the state’s tax system is nearly finished but an update provided to legislators on Tuesday showed the research is unlikely to settle the debate over the best way to overhaul New Mexico’s tax code.

Hypothetical policies conjured up by analysts showed the state could drive its gross receipts tax rate as low as 1.43 percent, not including local taxes, which would be about 3 percentage points lower than the current rate. But analysts found that would mean imposing the tax on just about everything — from wages to groceries and medical services that are currently exempt, in turn hitting hardest New Mexicans with the lowest incomes.

The numbers foreshadow an inevitable debate if legislators are to take any drastic steps to reform New Mexico’s tax system. While lawmakers on both sides of the aisle argue current laws are too convoluted and scare off much needed investment, many are also concerned about who might win and who might lose from any changes.

“I worry that if we’re not going to address it in a holistic manner, we run the risk of putting the burden more on poor people,” said Rep. Bill McCamley, a Democrat from Las Cruces.

Either way, legislators seem increasingly pessimistic about the prospects for major tax reform.

“The main thing we’ve been able to do with tax reform is nothing,” said Sen. Bill Sharer, a Republican from Farmington who backed the study. “We didn’t believe the numbers we were seeing. This gives us a tool moving forward.”

The analysis found that about half the money from the sale of goods and services in New Mexico is exempt from taxes. And the state relies on gross receipts tax revenue for about one-third of its annual budget — $2.1 billion of about $6 billion.

Wages across the state are exempted from gross receipts tax, for example, but amount to about $34.4 billion, according to Ernst & Young. Residential real estate transactions are too and total $4.5 billion. Nonprofit health care spending is about $3.9 billion and groceries another $3 billion.

The presentation to the Revenue Stabilization and Tax Policy Committee on Tuesday suggested eliminating some of those exemptions would cost low-income New Mexicans two to three times as much as wealthier residents, who spend a smaller share of their total earnings on food and health care, according to the analysis.

Not included in the report is any indication of what, if anything, changes in the tax code might do for New Mexico’s economy.

McCamley questioned whether legislators could offset those changes by making the state’s income tax more progressive, raising the prospect that any changes to the gross receipts tax may have to accompany reforms to other taxes, such as personal income tax.

Meanwhile, lawmakers are less optimistic about the political prospects of tax reform after making a push earlier this year.

“The big elephant in the room is whether there is the political will here to do anything,” said Sen. Clemente Sanchez, a Democrat from Grants. “Probably not this year. It’s an election year.”

Rep. Jason Harper, a Republican from Rio Rancho, pushed during the last session for a broader overhaul of the state’s gross receipts tax system.

The last session presented a unique political opportunity to reform the tax code, he said. Heading into an election and with a new governor coming soon after that, there appears to be less interest.

Pushing back tax reform to conduct another study, he said, amounts to a waste of money for taxpayers.