Checkout Questions: Paper or Plastic? Exemption or Rebate?

Exemption or Rebate? The Blue Ribbon Commission Has Guys on Both Sides

The last time New Mexico got serious about exempting groceries and medical services from the gross receipts tax, a very costly proposition for the legislature, an economist came through with an alternative.

The late Gerald Boyle of the University of New Mexico brought some calculations to the legislature’s finance leader, Sen. Aubrey Dunn of Alamogordo. Poor families paid a larger percentage of their income for gross receipts taxes than did wealther families. The tax was regressive.

Boyle had done some work on an idea that would correct the problem. The result of Boyle’s tables was the low-income tax rebate, as it was called. Dunn got it through the 1972 legislature, and Gov. Bruce King signed it into law. It apparently was the first in the nation, and the idea caught on elsewhere.

Subsequent sessions of the legislature embellished Boyle’s idea with other rebates, including a medical rebate, available to almost all New Mexicans who filed income taxes. Eventually, however, the legislature took back the rebates, claiming to consolidate them, and created the scaled down low-income comprehensive tax rebate (LICTR).

The Attorney General’s announced investigation into prisoners and others filing for the credit, which is available as a payment whether you owe taxes or not, could be the last straw of corruption and bureaucratic mishandling, spelling its doom.

Think New Mexico, the Santa Fe-based policy group headed by lawyer Fred Nathan, discounts the rebate, anyway, as an alternative to outright exemption of food from the gross receipts tax. “It promises to be ‘comprehensive,’ yet the rebate itself covers less than half of the gross receipts taxes on groceries annually paid by a typical low-income New Mexico family,” says the Think New Mexico food tax brochure, adding that it’s so complicated early half the filers pay someone to prepare the form.

The LICTR comes to about $25 million annually distributed to 260,000 filers, some of whom receive as little as $10, Think New Mexico says. Exemption of groceries from the gross receipts tax would be simpler and affect everybody.
But it would be far more costly. The latest estimate, by the Legislative Finance Committee, is that the food tax exemption would cost $104 million a year — $58 million from the state, $46 million from city and county governments. The medical services exemption (prescription drugs are already exempt) would cost $38 million state and $33 million local.

Nathan does not advocate repeal of the LICTR. But it obviously is one option as the blue ribbon tax commission, of which he is a member, considers recommendations to the special session of the legislature this fall. If the commission advocates exemption of groceries and medical services from the gross receipts tax, then it will have to suggest how to offset the $175 million in lost revenue.

Nathan, focused only on the food tax, suggests local governments could make up the revenue with increased alcohol excise taxes and the state could eliminate other exemptions that his group considers as dictated in the past by special interests.

The commission, however, is bound to hear the other side. Economist Brian McDonald, former director of UNM’s Bureau of Economics and Business Research, also a member of the commission, says eliminating the food tax violates several economic principles. In an outline of remarks to the LFC last September he said the move “narrows the tax base with the potential that tax rates on other goods and services will have to be increased.”

It exacerbates the “unequal treatment of goods and services,” and “violates the ease of administration tax principle,” and, he said, it is unnecessary for the 9 per cent of the population on food stamps, which are already exempt.

Further, McDonald said, elimination of the food tax “will not support economic development goals of New Mexico.” And, national statistics aside, two neighboring states, Utah and Oklahoma, also tax food purchases.