In case you missed it, as of July 1, the gross receipts tax (GRT) in Las Cruces rose to 7.5625%. This is due to the statewide .125 or 1/8 percent increase passed by the Legislature earlier this year to help close the state’s budget deficit.
But, while the recent .125 percent hike may seem innocuous enough (it’s only a fraction of a penny after all!), over time Las Cruces’ GRT has risen rapidly and become increasingly onerous. In fact, back in 1999, the GRT rate in Las Cruces was a relatively modest 6.375 percent. That rate now stands at 7.5625 percent, an increase of 18.6 percent in just over 10 years. The GRT rate in Las Cruces seems more likely to hit 8 percent in the near future than being reduced back towards 7 percent.
No one understands the harm of the GRT better than small business owners or manufacturers doing business in New Mexico. That is because the GRT, unlike the sales taxes in other states, hits businesses and hits them hard. New Mexico’s GRT differs dramatically from a sales tax because practically all goods and services are taxed. The only relief from application of the tax to business-to-business transactions is that the cost of raw materials going into the production of goods is deducted from gross receipts before applying the tax. Services get no such relief.
One simple economic problem is New Mexico’s lack of business competitiveness. Fred O’Cheskey, a former commissioner of revenue for the New Mexico Taxation and Revenue Department, called this lack of competitiveness “the biggest problem with the GRT.” He went on to say that, “When local R&D firms charge for New Mexico’s GRT, they are often outbid by out-of-state firms that don’t tack on a gross receipts tax.”
R&D firms certainly are not the only companies that suffer. Small businesses that contract out for legal or accounting services must pay 7.5625 percent when doing business in Las Cruces. They would pay nothing for these services in Texas, for example.
The second major economic problem with New Mexico’s GRT is “tax pyramiding.” Simply put, tax pyramiding is the taxation of an individual economic activity multiple times. Suffice it to say that pyramiding dramatically increases the already high tax burden in New Mexico.
The GRT even causes problems for New Mexico doctors. While other states largely exempt health care from taxation, deductibles and co-pays patients must pay to their doctors are taxed at the local GRT rate.
While these are just a few of the major problems with New Mexico’s GRT, one of the political problems with the GRT is that the average citizen/consumer is completely unaware of these unique aspects of the tax. That means that politicians who appreciate the large amounts of revenue that can be raised by the tax by a relatively small incremental tax will turn to the GRT first whenever they feel a shot of extra revenue is needed to cover for their over-spending.
Average citizens need to educate themselves on the economic impact of this tax and not be so susceptible to politicians’ – the GRT is a favorite revenue source for both state and local elected officials – desire to raise the GRT rate for whatever reason they choose. This is particularly true since New Mexico still faces a massive deficit and the Legislature will again be considering tax hikes in the near future.
The economically harmful GRT must be understood if we are to avoid further damage to New Mexico’s economy.
Paul Gessing is the president of New Mexico’s Rio Grande Foundation.
The Rio Grande Foundation is an independent, non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.