Gross Receipts Tax Pyramid Encourages Out-of-State Buys

“Pyramiding” of New Mexico’s gross receipts tax, in which the tax is added almost every time a business has to buy a service or good from another business, encourages businesses to buy from out-of-state vendors, LFC analysis shows.

The analysis scheduled to be presented to the committee during its July hearing suggests the gross receipts tax structure encourages businesses and consumers to buy from out of state because those businesses can charge less because they pay either lower or no gross receipts taxes.

In addition, small businesses are more likely to be hit by the impact of pyramiding because larger companies can afford to avoid the tax by keeping all steps of providing the goods or services in-house, the report says.

The hearing on tax policy, covering the pyramiding of the gross receipts tax along with the fairness of the state’s corporate income tax and the progressivity of the state’s individual income tax, is scheduled at 8:30 a.m. July 22.

The state gross receipts tax, higher than the U.S. average, generates 40 percent of all tax revenue in the state. Services and construction businesses pay 60 percent of the tax, while retail sales make up 26 percent of the tax.

New Mexico imposes the gross receipts tax on a much broader range of services than other states and, while the tax rate for most business types is average, the tax on business “inputs” is twice the national average.

The gross receipts tax burden is offset in part by low property taxes.

Low property taxes also help balance the overall tax burden on the state’s corporations. While the state’s corporate income tax is slightly above average, low property taxes mean the total tax burden, excluding severance taxes on oil and natural gas and other mining, is about average for the West, the LFC analysis indicates.

About 20,000 companies pay corporate income taxes, compared with the some 100,000 businesses paying gross receipts taxes. The corporate tax generates about 5 percent of total tax revenue for the state.

The LFC review of personal income taxes shows, even though the personal income tax rate is lower for low-income taxpayers, New Mexico’s total tax burden is heavier for those households because they spend a larger share of their income on property and sales taxes than higher-income households.

The tax burden on the average New Mexico household is above average for the region, although the share of taxes paid by low-income households is slightly below the regional average.