The issue of overall
tax effort by our state's population is important, but even more important is
what sectors of the population are required to contribute and how much. A state
tax system can be assessed for fairness by determining the distribution of tax
payments by income class. A tax system in which lower income groups pay the same
percentage as upper income groups is called a proportional tax system. The two
other classification of tax distribution are: 'regressive', in which lower income
groups pay at a higher rate than the upper income groups; and a progressive tax
system, in which upper income groups contribute at a higher rate than the lower
income groups. It is important to assess the New Mexico tax system for tax justice
by describing who pays state taxes by income level.
A
recent study done by the Washington-based Institute for Taxation and Economic
Policy (ITEP) for New Mexico Voices for Children describes who pays New Mexico
taxes before and after the introduction of the 2003 personal income tax cuts.
Table I shows that the New Mexico tax system was regressive in 2002, with higher
income groups paying between 8.5 and 6.3 percent of their income, and lower income
groups paying at 12.1 - 11.1 percent of their income. Even before the changes
to the tax system enacted in the 2003 legislature, New Mexico failed the criteria
of a just tax system: the principle that taxpayers should contribute to the common
good in line with their ability to pay. The ITEP study is based on an established
economic model that distributes tax payments from the broad categories of income
taxes (personal and corporate), property taxes, and sales taxes between the income
groups in accord with a documented set of tax incidence assumptions. The model
also takes into account special factors such as New Mexico severance taxes on
oil, natural gas, coal, and other natural resources. These taxes are allocated
to other states based on national resource consumption patterns.
The
New Mexico state tax system has undergone marked changes in the years since 2002.
Some of the changes in the tax system, such as removing the gross receipts tax
on food purchases likely had little overall impact, since the gross receipts tax
on all other goods and services was raised in order to avoid a significant loss
of revenue. The personal income tax cuts passed by the 2003 New Mexico Legislature,
however, will continue to have a significant impact on the both the level and
the distribution of tax effort in New Mexico. The 2003 income tax cuts had the
effect of shifting the overall New Mexico tax effort significantly from higher
to lower income taxpayers. The line labeled Federal Deduction Offset shows how
much of the tax cut is going directly to the federal Internal Revenue Service
as additional federal income taxes.
Table III presents the difference between New Mexico tax effort by income fifths
in 2002 and after the personal income tax cuts proposed by the Governor and passed
by the Legislature.
Table III clearly
shows that the 2003 personal income tax cuts will make the New Mexico state tax
system more regressive than it was before the tax cuts went into effect. The bottom
line of Table III shows that the lowest two fifths of the income scale are shouldering
more of the tax effort, while the upper two fifths are paying less.
New
Mexico is headed in the wrong direction in terms of tax justice. New Mexico is
headed away from basing its tax system on the ability to pay and towards forcing
the lower income classes who are politically and economically less powerful to
pay more than their share of the cost of providing government services.
