Biz tax reform
Bipartisan proposals could transform NM’s business climate
While lawmakers consider bringing the Legislature into the 21st century, they might also want to consider modernizing a Byzantine tax code that’s been shackling small businesses and deterring economic development for decades in New Mexico.
“Tax pyramiding,” for example, is an archaic taxing tactic when the state levies taxes multiple times on the same goods or services. Once is often not good enough in New Mexico.
Larger businesses, like manufacturers and corporate headquarters, have plenty of in-house accountants and lawyers. So they don’t feel the effect of pyramiding.
Small businesses, on the other hand, typically have to contract for professional services, and then pay gross receipt taxes on those services.
House Bill 367, supported by Democratic Gov. Michelle Lujan Grisham and cosponsored by Jason Harper, R-Rio Rancho, Benny Shendo Jr., D-Jemez Pueblo, Joshua Hernandez, R-Rio Rancho, and John Block, R-Alamogordo, would create a gross receipts tax deduction for certain business-to-business services, a provision known as “anti-pyramiding.”
The bill would also cut GRT base rates by one-quarter of 1%. Combined with a 0.25 percentage point drop over a two-year period approved by lawmakers last year, the state’s base GRT tax rate would drop to 4.625% in July.
HB 367 is before the House Taxation & Revenue Committee, but could be folded into another version of a tax package in the final weeks of the 60-day session that’s at its midpoint.
It’s encouraging to see the governor teaming up with Harper, a Republican, on tax reform. The Governor’s Office says cutting the GRT tax rate base would make New Mexico businesses more competitive, lower the costs of goods and services, and provide more than $400 million in financial relief to New Mexico residents and small businesses.
But bipartisan tax bills are running into opposition from Albuquerque and other local governments who don’t want to see their GRT revenues decreased. Local governments tack on their own GRTs to the state base rate, and then receive a portion of the total.
The New Mexico Municipal League projects exempting professional services from tax pyramiding could cost Albuquerque up to $30 million per year. Never mind that Albuquerque has a $1.4 billion budget, with a 20% increase in general fund appropriations from last fiscal year. Tax revenues aren’t the problem in Albuquerque or New Mexico, obstacles to conducting business are.
And while they’re at it, lawmakers should consider eliminating GRTs on medical services to combat our doctor shortage and skyrocketing malpractice insurance premiums. Food and medicine are GRT-exempt. Why would we want to continue taxing checkups and physicals?
More tax reform
Another tax-reform measure, House Bill 322, is making the rounds.
It is focused on creating a single corporate income tax rate of 5.9% and requiring all business income to be apportioned by the singe sales factor.
Corporations making $500,000 or more in a year are currently taxed at a top corporate rate of 5.9%. Corporations making $500,000 or less are taxed at a lower rate of $4.8%.
Having a graduated corporate income tax rate disincentivizes business growth and development. Why try and grow your business 1% when your tax rates will swell by 1.1%?
HB 322, cosponsored by Harper and Sen. Antonio “Moe” Maestas, D-Albuquerque, would implement a flat tax rate on corporate income taxes of 5.9%.
Meanwhile, small businesses, many of which are mom-and-pop sole proprietorships and limited liability corporations, are considered “pass through organizations.” So any profits are passed through to the business owner, who then pays personal income taxes on the profits, which have a top rate of 5.9%.
The bill does not change that. We need a tax structure that levels the playing field for them when competing against smaller corporations.
New Mexico also uses a complicated “three factor” corporate tax system that disincentivizes business growth. The three factor formula bases corporate taxes on the square footage of business property, the amount of payroll and the sales. Businesses take a hit on each.
Most states, including our neighbors, use a single sales factor that says the percentage of corporate activity in any state is the percentage of their sales in that state.
A three factor formula penalizes multi-state companies that want to build and hire more people in state because if they increase the percentage of their business activity in New Mexico, their state taxes also increase, even if their profits don’t.
So our tax code instead encourages them to build new plants and add workers in other states, most of which have a single factor corporate tax system.
HB 322, which got an 11-0 “do pass” recommendation last week by the House Commerce and Economic Development Committee, would require all business income to be appropriated by a single sales factor.
That’s already happening for instate manufacturing and corporate headquarters, which have managed to wrangle themselves a single sales factor. It’s time to make that happen for the rest of the companies doing business in New Mexico. It’s now before the House Taxation & Revenue Committee.
The time is now
The time is right for big reform to our tax structure with the state’s revenue bonanza. Taxation and Revenue Secretary Stephanie Schardin Clarke says the state can afford tax changes with cash reserves projected to exceed $2 billion for the current budget year.
With the governor’s backing and bipartisan support, we can finally enact meaningful tax reform in the next 30 days and greatly improve the business climate in New Mexico.