Tax policy bites

Filet mignon is more expensive than Hamburger Helper. If government imposes a tax based on a measure of dollars, wealthier people pay more. That’s called progressive taxation, and most of us agree it’s the right way to tax. Except when we don’t.

New Mexico’s tax policy right now is a mess, and is primarily hurting local governments, which rely heavily on gross receipts tax and property tax. That’s why you are hearing about proposals – for example – to reinstate the gross receipts tax on food.

When our gross receipts tax covered food, low-income households were protected in two ways. First, the tax didn’t apply to food purchased with food stamps. Second, low-income families received a rebate on their income tax, intended specifically to compensate them for taxes embedded into food and other purchases. If you believed these safeguards worked, the food tax was paid mostly by people who could afford it. Wealthier people who ate expensive food would pay the most.

But the tax was always controversial. No matter how you try to explain or justify it, taxing food just does not sound good.

However, the principle of taxing everything without exemptions created a very stable tax system. In 2003, Governing Magazine rated New Mexico one of four top states for “adequacy of revenue.” I read the article at the time and grimaced: “But don’t they know we tax food and medical care?”

That stability is gone now.

I talked tax policy recently with Dick Minzner, who was Taxation and Revenue Secretary in the last Bruce King administration. Looking political reality in the eye, Minzner said that despite current efforts to reinstate the tax on food, it’s unlikely to come back.

Minzner said the exemption for food opened the floodgates for other exemptions, so the gross receipts tax no longer functions as it used to. Fewer people pay more tax on fewer items, and the tax still generates less revenue.

Local governments also rely on property tax. As with gross receipts tax, New Mexico has created an exemption that doesn’t exactly benefit the people it was aiming for.

Property tax is wildly unpopular because it’s a big number billed in a lump sum once a year. New Mexico’s property tax is on the low side compared to most states, but again we have to ask who is subsidizing whom.

Property tax starts out based on the assessed value of the property.  All the budgets for all the services funded by property tax are added up, and the costs are allocated among taxpaying property owners. So far, this is based on the progressive taxation principle that property owners with more valuable property should pay more.

Some years ago the legislature decided to protect homeowners from big increases. So it enacted a three percent cap on property tax increases as long as you continue to own the home.

This was intended to protect low-income homeowners, especially those in the Santa Fe area, where wealthy newcomers were bidding up property values. We’ve heard about the “tax lightning” effect of big inequities in property tax based simply on when you bought your house, with new homeowners subsidizing their neighbors.

Minzner pointed out that the biggest beneficiaries of the cap are long-time homeowners of high-value homes. When rate increases are suppressed, the ones with the most expensive houses get the biggest savings, subsidized by the rest of us.

As local government budgets continue to be punished, we’re going to be hearing passionate arguments about these issues. No doubt there will be a few proposals for radical change in next year’s legislature.

Tax policy is complicated, and it’s hard to discuss rationally when every exemption has a passionate advocate and only a few policy wonks are arguing for the general good. But we really do need to revise this system. Prepare to hang on to your hat.

Triple Spaced Again, © New Mexico News Services 2014

 

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