Tax Talk: A Final Word

New Mexico Business Journal, Oct, 2001 by John A. Carey

The Small Business Survival Committee, a national nonpartisan, nonprofit small business advocacy group headquartered in Washington, D.C., ranked New Mexico 45th among the states for being friendly to small business and entrepreneurs in a report issued in July 2001. The group ranked 17 government-imposed or government-related costs that impact small business. New Mexico scored poorly on its top personal income tax rate, its top capital gains tax rate on individuals, its top corporate income tax rate, its state and local sales tax ratio, and its health insurance tax rate.

RECENTLY SEVERAL ORGANIZATIONS HAVE TAKEN A LOOK AT New Mexico's tax structure and rates. Almost all of these organizations have stated that our state's tax structure, at least in some areas, needs to be changed to make us more competitive with surrounding states.

A May 2001 report by New Mexico First, a nonprofit, nonpartisan public policy organization [see related article, Page 37], recommended that the state's personal income taxes be reduced at the highest rates and that the tax brackets be broadened and indexed for inflation. The report also recommended that capital gains not be taxed as ordinary income. In addition, the report stated that the pyramiding of the gross receipts tax, imposed on multiple transactions for one end product, should be eliminated.

A new Census Bureau study, released in July, reported that New Mexico ranked as the third highest state in state and local taxes as a percentage of personal income. Nationally, state and local taxes totaled 11.2 percent of Americans' personal income. New Mexico's percentage is 13.1, topped only by Maine and New York.

The Association of Commerce and Industry of New Mexico (ACI) supports a stable, long-term tax policy designed to allocate tax burdens among taxpayers and tax sources in a fair and consistent manner. ACI recognizes that state and local taxes must fund the reasonable requirements for public services at a responsible level. Finally, ACI believes that tax policy should avoid discouraging, and, when possible, stimulate private sector investment and job creation in New Mexico.

Features of certain taxes are substantially out of line with those of other states and create a disincentive to people and businesses moving into or remaining within this state. Three important examples, among others, are: personal income tax rates and brackets, capital gains rates, and the pyramiding of gross receipts tax on services.

New Mexico's top marginal personal income tax rate is higher than that of competitive and contiguous states. When New Mexico's 8.2 percent rate is compared to Texas at 0 percent, Colorado at 4.63 percent or Arizona at 5.04 percent, we don't compare favorably at first impression. The personal income tax impacts business far more than generally assumed because roughly 90 percent of businesses file taxes as individuals (e.g., sole proprietorships, partnerships, and S-corporations), and therefore pay personal income taxes rather than corporate income taxes.

ACI supports the proposition that a lower effective tax rate on capital gains will encourage New Mexico taxpayers who recognize large capital gains to maintain their residency in New Mexico and will encourage corporations to establish and retain their headquarters and facilities within the state.

ACI supports those exemptions and deductions in the Gross Receipts and Compensating Tax Act that are based on sound tax policy and serve the longstanding economic purpose of minimizing the pyramiding of tax as goods and services move through the stream of commerce. Any addition, deletion or amendment of existing exemptions and deductions should ensure that the tax burden caused by the pyramiding of taxes on business activities is lessened, not increased.

Specifically, ACI supports legislation to eliminate or modify the requirement that a subsequent sale of services be subject to gross receipts tax to be deductible. Business services acquired for resale, and not for consumption or use by the purchasing business, should be taxed in a manner comparable to the acquisition of tangibles purchased by a business for resale.

During the 2001 legislative session, the Legislature and governor approved a bill drafted by ACI that improves tax administration, both for the public and the state, in several ways. The bill establishes a new "managed audit" program with potential penalty and interest elimination, allows taxpayers to report gross receipts taxes due on an estimated basis and requires the Tax Department to publish written audit policies that govern the conduct of a tax audit, such as scheduling and what records may be examined.

There was bipartisan support for a personal income tax reduction during the 2001 legislative session; however, the version sent to the governor was vetoed. It is unfortunate the governor and legislative leaders could not come to terms on the scope of tax relief. As of this writing, the governor and legislative leadership were only in disagreement over $18 million out of a total state budget, including federal matching dollars, of $6 billion. ACI strongly encourages the governor and legislators to work hard to resolve their differences on this issue which affects all New Mexicans. [NMBJ]