Cut taxes, yes, but reform the system, too

Cutting taxes during an election year has to be one of the more popular decisions a politician can make — and in 2022, Gov. Michelle Lujan Grisham wants the Legislature to decrease New Mexico’s gross receipts tax rate.

It’s a move the governor claims will save New Mexicans some $145 million a year. That’s money people can use right now, and given the increase in oil and gas prices — bad for the individual but great for the state budget — tax relief would be welcome.

State revenue forecasters are projecting $1.4 billion in “new” dollars flowing in, on top of another billion in remaining federal pandemic relief funds. New Mexico is rolling in cash. That makes now an opportune time to cut the GRT — there are enough dollars in state coffers to make up for a temporary shortfall, at least in the short run.

But before everyone becomes too excited about tax cuts, let’s remember what happened to the last tax-cutting Democratic governor.

Gov. Bill Richardson slashed taxes for top income earners back in 2003, reducing the top rate from 8.2 percent to 4.9 percent. After the 2008 recession, when GRTs plummeted, the more steady revenues from those income taxes — hundreds of millions a year lost — would have helped the state avoid deep budget cuts.

Now, Lujan Grisham is proposing to cut 0.25 percent from the state gross receipts rate — New Mexico’s complex system of taxing goods and services.

That’s not all individuals must pay, though. The state base rate is 5.125 percent, but counties and cities all add on their share. In cities such as Santa Fe, the GRT is 8.4375 percent. Lujan Grisham’s proposal would reset the base to 4.875 percent, which we trust would not be an invitation to cities to raise their GRTs.

Pretty much everyone agrees the tax is too high and worse, creates a system that causes some business owners and service suppliers to pay multiple times at different points in the supply chain. Called tax pyramiding, it makes doing business in New Mexico expensive.

Yet the state needs money to do the job of governing, whether it’s funding public schools, paying the salaries of social workers or keeping enough police officers on the street.

Gross receipts taxes bring in 42 percent of the $7.38 billion general fund revenue. Fiddle too much with the GRT, and the state will lose essential revenue.

Even popular changes to the GRT — exempting food back in 2004 — have had consequences, sharply cutting revenues to local governments. Many argue that to truly lower the GRT base, taxing all goods and services should be part of the discussion. One reason the GRT is so high is the number of exemptions allowed. (Newspapers are sold tax-free, just like food, by the way.)

Reducing the rate without broadening the base can lead to future shortfalls, so presenting a GRT reduction without putting it in the context of tax reform could be short-sighted. If nothing else, cutting the base GRT should include a pullback provision if the revenue loss proves too great. In the past, we have not supported reinstating the food tax, but New Mexico needs fewer exemptions to allow a lower GRT.

The governor’s decision to ask for a reduction in the GRT in 2022 offers an opportunity to put money in people’s pockets — which they need — but must include building a better tax system for the future. Our current system is too volatile. Creating a more stable foundation will help New Mexico encourage economic growth while ensuring it has adequate revenue to meet its many challenges.

Cutting taxes can’t just be an election-year strategy. It needs to sustainable, planned — and have an escape hatch if the economy tanks.