Tax policy change is necessary for jobs

This year’s hot term in economic development jargon is the “single sales factor.”

Some of the current buzz in economic development circles is that the single sales factor is the first concern of businesses considering locating in New Mexico. If we don’t have it, the rumor goes, they won’t look further.   (They used to say that about workers’ comp, but that issue is off the endangered species list for the moment.)

The single sales factor is at the top of the wish list EDD Secretary Jon Barela is calling the New Century Jobs Agenda, a package of mostly legislative proposals that EDD is hoping will boost our state’s persistently lagging private sector economy.

If New Mexico is serious this year about economic development, our legislators have to pay attention to the fact that business wants the single sales factor and 25 other states have it.  That’s the nature of the highly competitive game of economic development these days.

Dick Minzner, former secretary of the Taxation and Revenue Department, framed the issue in a recent briefing paper, noting that New Mexico receives $300-400 million per year in corporate income taxes, and most of those taxes are paid by large multistate or multinational corporations with locations in New Mexico.  Smaller locally owned businesses don’t pay the tax, he says, because most of them are organized in different business structures, such as S corporations or limited liability companies, which do not pay corporate taxes.  The income from these types of businesses passes through directly to the owners, who then pay the tax as personal income tax.

New Mexico has a formula for determining how a corporation figures out its taxes.  The formula has three factors:  the percentage of the corporation’s sales that take place in New Mexico, the percentage of the corporation’s property or assets in New Mexico and the percentage of the corporation’s payroll in New Mexico.  New Mexico gives more weight to the assets and payroll than other states do.

If a corporation invests in a plant here and employs workers here, Minzner explains, but sells most of its products elsewhere, the formula taxes the corporation more for investing and creating jobs here than it would in other states.  This discourages companies from building plants here.

Most states used the three-part formula in the past, but have changed their tax structure.  Either they have changed the factors to give less weight to payroll and property, or they have dropped payroll and property entirely and tax only on sales. This is called the “single sales factor”or “sales only”formula.

A recent study for the New Mexico Tax Research Institute notes that the “effective tax rate” for corporations operating in New Mexico is not just higher than surrounding states, but much higher.  Changing the formula to single sales factor would produce the biggest change compared to other alternatives.

So why does New Mexico — with its perennial low income, high poverty, and all the related social ills — resist this change?

There’s something we don’t like about being forced into a policy change because powerful business interests are playing states against each other.  I don’t like it, either, and in moments of wishful thinking, I wish states would band together and agree to uniform tax laws that don’t give advantage to any state over any other.  But that’s not the world we live in.

Our legislature can waste its breath and our time for 60 days debating over which tax policy is ethically superior.  Or legislators can ask and answer a simpler question: would New Mexico be better off with more businesses employing more workers than with getting more tax revenue from the relatively few businesses that have chosen to be here in spite of our unfriendly tax climate?  That’s the question.

Triple Spaced Again, © New Mexico News Services 2012

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