New Mexico’s state and local tax system is already unfair—with the lowest-income New Mexicans paying a rate double that of the highest-income earners. A so-called ‘flat tax’ or ‘consumption tax’ would make the tax system even more regressive. Still, there are legislators who would like to enact a consumption tax. Representative Tom Taylor and Senator William Sharer introduced twin bills (HB-369 and SB-368) during the 2013 legislative session to do just that. Although that legislation did not pass, it is all but guaranteed to make a reappearance in January—and in subsequent years if it is not adopted in 2014.
A consumption tax—which is also called a 2 percent tax—sounds fair because it lowers the rate of the gross receipts tax (New Mexico’s sales tax). Sales taxes are regressive—meaning those with the lowest incomes pay the highest rates. Low-income working families must spend all of their monthly income just to get by—and much of what they purchase is taxed. Higher-income earners, on the other hand, can afford to save some of their money. So lowering the rate would benefit low-income New Mexicans, right?
Not so. The consumption tax legislation in question would also eliminate both the personal and corporate income tax, while applying the gross receipts tax (GRT) to wages and salaries. Unearned income, such as capital gains—which overwhelmingly goes to those at the top of the income scale—would not be subject to any tax. Refundable tax credits for low-income families would be eliminated.
Our personal income tax is the only part of our tax system that is progressive—meaning it relies less on those with the lowest incomes. Graduated rates—which increase as incomes increase—and refundable tax credits, such as the Working Families Tax Credit, are what make the income tax progressive. Even so, the income tax only partially offsets the regressivity of the rest of the tax system. When all state and local taxes are taken into account, the lowest-income New Mexicans pay more than 10 percent of their income in these taxes, while those at the very top pay less than 5 percent.
All progressivity is removed from the state’s tax system when refundable tax credits are eliminated and a flat GRT—2 percent, regardless of income level—is assessed on all wages and salaries. The flat tax legislation from 2013 did include a low-income tax credit, but it would be worth less than the current credits.
Eliminating the income tax, particularly on capital gains income, would be a huge windfall for the wealthiest New Mexicans—because that’s where the vast majority of that income goes. Capital gains is the income realized when something of value—stocks or real estate, for example—is sold at a profit. Almost 90 percent of the capital gains income claimed in New Mexico goes to just 10 percent of the tax filers. These are individuals and families earning more than $100,000. This income group currently pays about 8 percent of their income in state and local taxes. As it is, they can already deduct half of their capital gains income from their tax bill. But under the consumption tax, not one penny of capital gains income would be subject to the 2 percent GRT because it is not considered wages or salaries.
Eliminating corporate income taxes would also make the system more regressive. Such a move would release profitable corporations from any responsibility to help pay for the services—such as roads, public safety, and the court system—they require in order to do business. All of the cost for these necessities would fall on individuals, and it would fall hardest on those who could least afford it.
What is perhaps most disconcerting about a flat or consumption tax is the great unknown as to whether it would bring in enough revenue to provide programs like education and health care at their current levels. My belief is that it would very likely generate less revenue. While that is a prime concern with such legislation, the simple fact that it would hurt New Mexico’s already struggling families should be reason enough to soundly reject it.
Gerry Bradley is NM Voices for Children’s Senior Researcher and Policy Analyst. You can read more in his report, The 2 Percent Disaster: Tax System ‘Reboot’ Would Harm New Mexico’s Low-Income Families. The executive summary is also available online.
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