Not a Sales Tax

New Mexico’s gross receipts tax is a nightmare. If there is a single tax that can be pointed to as a cause of the state’s historically-poor economic performance – New Mexico consistently ranks near the bottom of all states in average personal income – it is undoubtedly the gross receipts tax.

While many New Mexicans, including well-informed citizens like state legislators, often call the gross receipts tax a “sales tax,” those who own small businesses, particularly in services sector, know better. The New Mexico Taxation and Revenue Department explains the differences on their website:

“The gross receipts tax, very different from a sales tax, is a tax on the privilege of doing business in this state. It applies to the total amount of money or other considerations (barter, for instance) that a business receives for its transactions here in New Mexico.”

“The taxable amount is the gross amount – not net after business expenses – and the tax liability belongs to the business instead of the customer. The gross taxable amount includes all reimbursed expenses billed to the customer: meals, travel, hotels, shipping, handling, postage, etc.”

New Mexico’s gross receipts tax is unique nationwide in the sense that no other state in the nation has such a broad-based tax that is applied at such a high rate. Hawaii and South Dakota are the only other states that levy such a broad-based consumption tax, but those state’s rates 4.5 percent (Hawaii) and 6 percent (South Dakota), are much lower than New Mexico’s rates which are near 7 percent in most cities. Hawaii, like New Mexico, is a high tax state, but South Dakota charges no income tax and is considered a low tax state.

Unfortunately for New Mexicans, having a broad-based tax like the GRT that is applied at high rates also makes it economically harmful. For starters, when an entrepreneur sells her service, she has to pay tax on the entire amount received even though a sizable portion of her receipts may be necessary to cover her costs. The more costs she has relative to her receipts, the more burdensome the GRT. High overhead service providers, such as doctors, have been particularly hard hit by this tax in New Mexico.

The damage done by the tax is exacerbated by what is known as “tax pyramiding.” Businesses often have to purchase services from other business. For example, one business may need to get its roof fixed, need accounting services, legal services and so on.  Each time it purchases these kinds of services from another vendor it must pay the gross receipts tax.

Lastly, the GRT by its very nature creates political problems. Since the GRT is so injurious, each industry has a strong incentive to lobby politicians for exemptions. Such favor-seeking via the political process is wasteful. The resources used to lobby the government for special tax treatment or to defend from differential tax hikes could be better employed improving or reducing the cost of the product or service.

An example of recent successful favor-seeking in New Mexico involves the health care industry. Managed care firms successfully exempted themselves from the gross receipts tax while the gross receipts tax for fee-for-service firms actually went up.  Now fee-for-service firms in New Mexico are burdened by taxes that are roughly one-third higher than their managed care counterparts. A similar and perhaps even more problematic situation occurred when New Mexico eliminated its GRT on food in starting in 2005, but raised the GRT rate by 0.5 percent. By skewing economic activity, the GRT creates perverse economic incentives that make New Mexicans poorer.

Despite these very serious problems, New Mexico’s gross receipts tax is here to stay. In fact, other states are adopting similar taxes albeit at far lower rates. Texas and Ohio are two states that have done so although each state applies its tax at rates of one percent or lower.

Ultimately, New Mexico’s politicians need to rediscover the original intent of broad-based taxation that the gross receipts tax was originally designed to achieve. Rather than allowing exemptions for the film industry, the spaceport, groceries, and managed care (just to name a few of the biggest ones), lawmakers should at once eliminate these exemptions, lower the tax rate substantially, and make it next to impossible for special interests to favor themselves with exemptions.

Broad-based taxation is a good idea when low rates and equal treatment are part of the equation. To its detriment New Mexico has strayed far from this concept.

Paul Gessing is the president of, and Dr. Messenheimer a senior fellow with, the Rio Grande Foundation, a 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.