Gross Receipts Tax Hampers State Businesses

In case you missed it, Clovis’ gross receipts tax rose to 7.5625 percent on July 1.

This is due to the statewide .125 percent increase passed by the Legislature earlier this year to help close the state’s budget deficit.

While the hike may seem innocuous enough (it’s only a fraction of a penny after all!), don’t forget it was 6.1875 percent in 1999; that’s a 22 percent increase in just over a decade.

And now the GRT rate in Clovis may rise another .25 percent as Curry County commissioners approved a November ballot issue to pay for a $33 million judicial complex.

No one understands the harm of the GRT better than small business owners or manufacturers doing business in New Mexico. That’s 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 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 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 Clovis. 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.

Worst of all? The average citizen/consumer is unaware of these unique aspects of the tax. That means politicians who appreciate the large amounts of revenue will turn to the GRT first whenever they feel a shot of extra revenue is needed to cover their over-spending.

The economically harmful GRT must be understood if we are to avoid further damage to New Mexico’s economy.

Paul Gessing is president of New Mexico’s Rio Grande Foundation, which promotes limited government, economic freedom and individual responsibility. Contact him at: pgessing@riograndefoundation.org