by Joey Peters, NM Political Report
December 22, 2016

Media coverage of planned tax legislation has so far focused on one hot-button topic of the proposal—reinstating a state tax on food.

Santa Fe Archbishop John C. Wester and advocacy groups like New Mexico Voices for Children have vocally opposed the idea.

But the two state representatives behind the proposal have not actually filed any legislation on the matter for the session that begins in January. Legislators could begin introducing bills on Dec. 15.

Rep. Jason Harper, R-Rio Rancho, said any proposal he introduces will aim at a near-complete overhaul of the state’s complex gross receipts tax (GRT) system. Harper says his main plan is to eliminate most of the hundreds of exemptions and deductions in the state tax code. Critics say these deductions are responsible for a sharp spike in the overall GRT rate in recent years that, in the end, hurts taxpayers.

New Mexico relies heavily on GRT for its state revenue. Generally, GRT means a state-imposed tax on receipts for services performed in the state; property that gets sold, leased or licensed and the right to operate a business franchise that employs New Mexicans, according to the state Taxation and Revenue Department.

New Mexico adopted this tax structure in the 1960s, but businesses and other special interests have  successfully lobbied GRT tax breaks for themselves since then.

Currently, about 370 exemptions and deductions have been written into the state tax code. Sales from food is one of them.

“The original idea [behind the GRT] was to have a low rate and a broad base,” Steve Kopelman, executive director of the New Mexico Association of Counties, explained at a legislative tax conference in Albuquerque earlier this week.

By “low rate and broad base,” Kopelman meant an overall low GRT rate on a broad range of goods and services within New Mexico.

But after state lawmakers dropped food purchases from the state’s tax base in 2004, many more exemptions followed. New Mexico Municipal League Executive Director Bill Fulginiti described dropping the food tax as using a “meat cleaver” to cut at the big base in the state’s tax system. The result, he and others emphasize, led to a higher GRT rate on remaining taxed items.

“The [GRT] rate was between 5.5 and 6 percent in 2004,” Fulginiti said this week at the same tax conference. “It’s increased to near 8 [percent] now. Why is that? We took a lot of things out of there.”

The result of all the exemptions and deductions, according to Harper, hurts businesses and taxpayers. He said he is aiming to take “a scalpel approach” to the code by eliminating many of the deductions loopholes. That would drop the overall state GRT rate from roughly 8 percent (that number is approximate because it differs by country) down to 4 percent.

“Everything else that we buy—your diapers, your car repairs, your napkins and Kleenex and cleaning supplies, clothes, when you go out to restaurants—everything else you pay 8 percent on, that will do down,” Harper said in an interview. “So for the vast majority of New Mexicans, we’re going to be paying less total sales tax than we are right now, even when we put food back on.”

Though Harper and his colleague on the proposal, state Rep. Bill McCamley, D-Mesilla Park, haven’t yet written the legislation for the proposal, many of the ideas that could go into the bill were presented last week during hearings of the interim Legislative Revenue Stabilization and Tax Stabilization committee.

The food tax provision, for example, would still exempt people who qualify for Supplemental Nutrition Assistance Program benefits, formerly known as food stamps, from paying a state food tax. Recipients who run out of SNAP benefits for the month will still be exempt from a food tax as long as they bring their SNAP card to the grocery store along with other payment, Harper said.

Other parts of the planned tax overhaul legislation would include establishing a state tax on internet sales and tackling so-called “pyramiding” in the state’s tax system.

Harper would like to rid taxes on “business-to-business” services, such as when a grocery store owner pays an accountant to prepare company taxes.

This type of tax, he said, “stands out like a sore thumb” compared to other states.

“If you have a small business and you hire an accountant or a lawyer or any kind of service that you need to help with your business, we tax that here in New Mexico,” Harper said. “And that is very weird and very strange and that cost gets rolled into everything else.”

He does plan to preserve one type of business-to-business pyramiding that  involves sales of tangibles—for example when a computer company buys desks for its employees.

But taxes on goods for resale, like when a grocery store buys food from a wholesaler to sell to its own customers, are currently exempt from the state’s tax code. Harper said he would leave that form of pyramiding exemption in place.

Judging from the early and loud reaction from food tax opponents, any tax overhaul proposal will be controversial this coming session. The issue is in fact so controversial that the sometimes garrulous McCamley refused to comment on it for this story.

Harper, for his part, acknowledged that the bill will be tough to pass.

Yet incoming state House of Representatives Speaker Brian Egolf and incoming state Senate Majority Leader Peter Wirth, both Democrats from Santa Fe, signalled their support for a broad overhaul at the  conference.

Egolf said  he is “absolutely committed to putting tax reform forward” and Wirth said that in the past, the legislature often approved an annual “Christmas tree bill” that would feature several tax exemptions for different items and industries. Wirth also noted that he voted for such measures in his decade-plus career in the legislature.

“The challenge here is to have the same bipartisan lovefest to do the opposite,” Wirth told the conference.

The biggest challenge to any kind of overhaul may be the state’s impending budget deficit. Right now, Harper said he and McCamley are working on compromise for Democrats that want to raise taxes and Republicans who want to lower taxes: a revenue-neutral measure that wouldn’t generate “new” money for the state.

But at the tax conference, Egolf said that new money is necessary.

“We have to keep an open mind and a realistic view that there has to be some new element of revenue on the table,” Egolf said. “The more we get ahead on that conversation, it’s easier for us as a legislature to bend the pro-jobs, pro-business expenditures in the state.”

Copyright 2016, NM Political Report (