Of Groceries, Ray Guns, and the Gross Receipts Tax

Happy New Fiscal Year. Ready for higher taxes?

Starting July 1, furniture, haircuts, toys, shoes, lawn care, and milkshakes will be more expensive for most New Mexicans. The gross receipts tax (GRT), the dominant source of local-government revenue, will rise in many communities, including Albuquerque, Rio Rancho, Las Cruces, Roswell, Las Vegas, Deming, and Silver City.

In Santa Fe, the rate is slated to increase from 8.1875 percent to 8.3125 percent. But not if the city has its way. A few weeks ago, the City Different filed a taxpayer-friendly lawsuit to block the GRT hike the county adopted in March. Citing state statutes, Santa Fe — as well as Española and several local businesses — allege that “within the boundaries” of incorporated Santa Fe County municipalities, the tax should not apply.

It’s up to the courts to decide the validity of the lawsuit. What’s not in dispute is that the the city-county faceoff would not exist were it not for governors’ and legislators’ never-ending tinkering with the GRT. When Santa Fe’s commissioners adopted the one-eight-of-a-cent tax increase three months ago, it was justified as a way to raise money to compensate for funds the state would no longer provide. The soon-to-be-ended subsidy was created to ease the fiscal pain of the 2005 removal of groceries from the GRT.

A bit confused? It’s understandable. The GRT is less a revenue-raising system than a political plaything, a mechanism for elected officials to perpetually penalize and reward behaviors, purchases, and investments in the Land of Enchantment. Boosting jobs, growing incomes, luring entrepreneurs, providing tax relief for the poor — it’s all achievable, we’re told, if visionary politicians make the proper adjustments to GRT rates, deductions, and exemptions.

Every New Mexican buys groceries, but very few of us acquire ray guns. The Pentagon does, and with growing interest in directed-energy weapons, the recently completed special legislative session produced a GRT deduction for receipts earned from producing armaments that use “the frequency spectrum, including radio waves, light and x-rays.” The perk will benefit defense contractors, and presumably, “attract new projects and employers to New Mexico and increase high-technology employment opportunities” — boilerplate language for the economic-development schemes frequently embraced by both political parties in New Mexico.

Directed-energy devices might be the future of defense. But perhaps they’ll prove to be of limited value to warfighters. Are state legislators qualified to make the right call? If history is any guide, the answer is no. Unintended consequences are inevitable when politicians fiddle with the tax code.

That brings us back to the GRT and groceries. In 2013, Dick Minzner, a former secretary of the New Mexico Taxation and Revenue Department, and Brian McDonald, a former director of UNM’s Bureau of Business and Economic Research, concluded that the effect of the food-tax exemption “has been the opposite of that intended,” because “by providing “only limited benefit to the poorest … of our households, combined with a tax increase on all other purchases, [it] probably made our tax system more regressive by most measures.”

The rates for New Mexico’s GRT are far too high. And the levy’s broadness induces pyramiding, which legislative analysts noted “occurs when the GRT is applied to business-to-business purchases of supplies, raw materials, equipment, creating an extra layer of taxation at each stage of production.” But as a policy brief written by the left-wing organization New Mexico Voices for Children advised more than a decade ago, “Piecemeal tax policy doesn’t work because tax systems are more than the sum of their parts.” Exactly. The GRT has been meddled with enough. It’s time for a simpler, more affordable, and pro-growth gross receipts tax.

D. Dowd Muska (dmuska@riograndefoundation.org) is research director of New Mexico’s Rio Grande Foundation, an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.