NCPA - National Center for Policy Analysis


May 4, 2007

If states enact gross receipts taxes without placing strict limits on future rate hikes, they will wind up with a loophole-ridden, business-killing tax like New Mexico's, warns Harry Messenheimer of the Rio Grande Foundation.

The high tax rates in New Mexico make for something of a controlled experiment in taxation and the economic effects of "tax pyramiding," says Messenheimer:

  • The primary differences between a gross receipts tax and a sales tax are the taxation of services and the "pyramiding effect."
  • Pyramiding occurs when one business purchases an already-taxed good or service from another business, causing taxes to build upon one another.

"For many businesses, especially those with high overhead costs and that are involved in the service industry -- doctors are a good example -- tax pyramiding can be especially problematic," says Messenheimer:

  • The fiscal impact of tax pyramiding is difficult to quantify, but economists estimate excess revenue thus collected by New Mexico -- the taxing of taxes -- is in the $400 million to $500 million range.
  • Rather than maintaining the tax at relatively low rates across the board, the tendency has been for politically influential industries to carve out specific exemptions for themselves in order to reduce their tax burden.
  • Managed care firms, for example, persuaded the state to exempt their industry from the gross receipts tax in 2004; simultaneously, the gross receipts tax for fee-for-service firms increased.

When businesses consider locating in New Mexico, some sort of gross receipts tax exemption is nearly always negotiated.  This behavior skews the marketplace, gives politicians undue influence over business activity, drives tax rates up, and ultimately makes New Mexico's economy less efficient, says Messenheimer.

Source: Paul J. Gessing, "New Mexico's Gross Receipts Tax Offers a Cautionary Tale," Heartland Institute, May 2007; and Paul J. Gessing and Harry Messenheimer, "New Mexico's Harmful Gross Receipts Tax: A Warning to Other States," Rio Grande Foundation, Policy Brief, January 29, 2007.


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