Favorite road to new revenue - Sales Tax

New Mexico Business Journal, Oct, 1990 by Arlene Odenwald

Favorite road to new revenue

Of all three taxes - income, property and sales-type taxes - the latter is the most regressive, yet it is one of the easiest, most popular taxes to levy.

When former Arizona governor Bruce Babbitt ran for president he was the only one among all the candidates with pluck enough to say taxes had to be raised.

But which tax did he recommend? The sales tax. Babbitt may be admired for his honesty and courage, but his choice of tax leaves something to be desired.

The popularity of the sales tax is purely political, because gross receipts taxes are easiest to sell to the community at large.

Whenever the legislature tries to raise any other tax, there is a massive lobbying effort against it, says New Mexico state Rep. Dick Minzner, current chairman of the House Taxation and Revenue Committee and former candidate for attorney general.

The impact of gross receipts is so disparate, says Minzner, there is seldom any opposition expressed against it, which is what makes it an attractive tax.

Land taxes and market (sales) taxes are rooted in ancient times, state Carolyn Webber and Aaron Wildavsky, authors of "A History of Taxation and Expenditure in the Western World."

Webber and Wildavsky say because exchange itself is universal or perhaps because transactions localized in markets are easy to tax.

Up until the 18th century all sales-type taxes were considered equitable. In those days, fiscal equity meant that, without exception, all men should pay taxes.

But, as sales taxes increased so did food riots and tax revolts, prompting thoughtful men's attention to the tax. Soon sales taxes began to be viewed as an inequitable burden on the poor.

Gross receipts and other sales-type taxes do not take into consideration the fact that low income people spend a higher proportion of their total income on goods and services than higher income people do.

That is why they are regressive. Poor people do not make enough money to save or invest much, therefore more of their total income is spent on goods and services. Since they do not make enough money to save, they cannot invest their income in areas where non-taxable income is usually placed.

To remedy the regressivity of sales taxes at least on subsistence goods most states exempt food and medicine. New Mexico does not.

Instead, New Mexico tries to remedy the regressivity of the tax through a rebate program (the Low Income Food and Medical Rebate), which rebates a dollar amount to eligible low income at the end of every year.

Besides the Low Income Food and Medical Rebate, the state of New Mexico also has the Low Income Comprehensive Tax Rebate - two programs cited as addressing at least part of the contention that gross receipts taxes are regressive.

According to one tax expert, one has to be careful when saying one has removed regressivity by taking sales-type taxes off food or drugs.

There was a time when every New Mexican used to receive a rebate on gross receipts taxes paid on food and medicine. Only recently did the state limit the rebate to low income people. People make wrong assumptions, he says.

The premise that low income people contribute far more in proportion to their means than do the rich is true, he says, but using the same premise to exclude the middle income from gross receipts rebates on food is false.

The fact is that middle income people proportionately spend about the same amount of their total income on food that poor people do. He excludes drugs as a critical issue, because they are usually paid by a third party.

New Mexico's Low Income Comprehensive Tax Rebate was an attempt to minimize the steep regressivity of all taxes - state and local - as they impacted poor people. It was designed so that poor people would be taxed proportionately the same as middle income people.

The law works fine, say tax experts, but it has to be adjusted over time because of inflation. And the rebates have not been adequately adjusted to reflect inflation's erosion of the dollar.

The low income tax credit is a reduction in regressivity, but a reduction that has been decreased by inflation over time, because the amount of the credit has remained the same.

New Mexico along with other states has been complimented for its attempts to reduce the regressivity of the gross receipts tax.

New Mexico's remedy of rebating dollar amounts at the end of the year is the least expensive way to address regressivity. The other option, of course, is to completely eliminate gross receipts tax on food and drugs as other states do.

But, tax experts say, that option would cost the state of New Mexico enormous amounts of revenue.

New Mexico differs from other states in gross receipts in one other important area. New Mexico is one of a handful of states that slaps a gross receipts tax on services as well as goods.

Many people believe, like Sen. James Caudell, that New Mexico's gross receipts on services places New Mexico businesses at a disadvantage when competing with other states.

Laird Graeser, director of tax research and statistics for the New Mexico Taxation and Revenue Department, addresses this peculiarity in a paper he wrote entitled, "Sales Taxation of Services," published in July.