New Mexico Governor Bill Richardson has rejected a broad based approach to taxation and has agreed with state lawmakers that they should balance the budget partially on the backs of a politically unpopular minority.
Richardson on Wednesday signed into law several tax provisions, including an increase in the state portion of the gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. from 5% to 5.125%, and an increase in the cigarette excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. from $0.91 to $1.66 per pack. At the same time, he vetoed a provision that would have expanded the gross receipts tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to include groceries.
As we have pointed out before, the arguments for exempting groceries from the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. , which often focus on the regressivity of taxing food, are weak. Such exemptions are touted as taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. relief for the poor, but in order to provide relief to a minority of the population the exemption gives a tax break to all consumers. In the end this narrowing of the tax base is likely to just drive up tax rates. Grocery exemptions also have the negative side effects of increasing tax complexity and compliance costs and reducing revenue stability. A better approach would be to implement a broad based sales tax with a low rate. If lawmakers are concerned that low income residents cannot afford groceries, they should target the problem through existing programs like food stamps that are designed to provide a benefit only to those who need it.
Meanwhile, Richardson signed into law an increase in the regressive cigarette excise tax. This contrast serves to illustrate how politics routinely trumps sound tax policy. In the case of cigarette taxes, the regressivity is always tolerated because smokers are a politically easy target for tax increases and lawmakers believe it is their job to influence individuals’ personal decisions. The negative externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. argument is often used in support of cigarette taxes, but on closer inspection this justification falls apart.
Update: In the original post I scolded New Mexico for having a gross receipts tax (GRT). A former colleague, Josh Barro, reminded me that while true GRTs are a bad from of taxation, New Mexico’s so-called GRT really functions more like a broad based sales tax, and so does not deserve the standard GRT rebuke.
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