New Mexico Governor Opposes Regressive Taxation, Except When He Supports It

March 26, 2010

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 tax from 5% to 5.125%, and an increase in the cigarette excise tax from $0.91 to $1.66 per pack. At the same time, he vetoed a provision that would have expanded the gross receipts tax base to include groceries.

As we have pointed out before, the arguments for exempting groceries from the sales tax, which often focus on the regressivity of taxing food, are weak. Such exemptions are touted as tax 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 externality 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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